The Countdown to 20,000... what's your prediction? - Updated

When it comes to Real Estate on the Wet Coast right now, the story is all about the burgeoning inventory.

While total inventory has been higher before, never has it been this high this early in the year. More interestingly, there has not been one single day this year where the total number of sales has been higher than the total number of new listings.

However... until prices start to fall noticeably, it isn't a crash or even a severe 'correction'. 

But one thing is for certain - it IS damn interesting. There's a strong possibility we will crack the 18,000 mark tomorrow and all indications are that the Vancouver market is moving resolutely to the psychologically significant 20,000 mark.

So let's have some fun with it.

Each night we post the days total inventory increase/decrease as well as the total market inventory figures. On which night, exactly, will we crack the 20,000 mark?

Between now and Sunday chime in with your prediction in the comments section.

If you don't have a blogger ID and you normally post anonymously, add a pen name with your prediction so we can keep track of who is predicting what.

There's no prize, but let's see who can pick the day closest to the actual day inventory cracks the 20,000 mark.

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On another note, many of you will recall how we questioned the media trumpeted sell out that occurred at Marine Gateway, the first such condo pre-sale sell out in Vancouver in years.

Shortly after that MSM fantasy, lightening struck again with the 'sell out' of Telus Garden.

But did they actually sell out?

Not according to downtown realtor Ian Watt.

Such is the state of the market that the ever-bullish car-cam booster Watt is calling bullish*t on the media hype of the Telus Garden sell out.

Even more astonishing is the way he trashes pre-sales and closes by throwing water on anyone hoping to flip their pre-sale purchase at Telus Garden.

Meow!

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The Emperor is naked

Faithful readers know we keep a keen eye on monetary policy, both in Canada and abroad, because our housing bubble in intertwined with it.

And today's post is a long one on just that topic: monetary policy.

In the past we have posted about David Stockman, a former U.S. politician and businessman who served as a Republican U.S. Representative from the state of Michigan from 1977–1981.

He is, however, more well known as the director of the Office of Management and Budget under President Ronald Reagan from 1981–1985 and has been a keen critic of US monetary policy.

Recently he has spent a considerable amount of time talking and writing about the effect of government-funded, debt-fueled spending on the stock market and the ultimate effect of Quantitative Easing.

The respected Stockman believes we are in the last innings of what he describes as "a very bad ball game. We are coping with the crash of a 30-year–long debt super-cycle and the aftermath of an unsustainable bubble."

As for Quantitative Easing, Stockman contends it is making the situation worse by facilitating more public-sector borrowing and preventing debt liquidation in the private sector — both erroneous steps because they prevent the US federal government from getting its financial house in order.

Says Stockman:

"We are on the edge of a crisis in the bond markets. It has already happened in Europe and will be coming to our neighborhood soon."

To Stockman the cause of the crisis is the US Federal Reserve.

"The Fed is destroying the capital market by pegging and manipulating the price of money and debt capital. Interest rates signal nothing anymore because they are zero. The yield curve signals nothing anymore because it is totally manipulated by the Fed. The very idea of "Operation Twist" is an abomination.

Capital markets are at the heart of capitalism and they are not working. Savers are being crushed when we desperately need savings. The federal government is borrowing when it is broke. Wall Street is arbitraging the Fed's monetary policy by borrowing overnight money at 10 basis points and investing it in 10-year treasuries at a yield of 200 basis points, capturing the profit and laughing all the way to the bank. The Fed has become a captive of the traders and robots on Wall Street.

Stockman believes the Fed needs to get out of the way and not act like it is the central monetary planner of a $15 trillion economy.

But because they will not get out of the way, he believes we are in the final innings of a debt super-cycle. And what is the catalyst that will end the game?

"I think the likely catalyst is a breakdown of the U.S. government bond market. It is the heart of the fixed income market and, therefore, the world's financial market.

Because of Fed management and interest-rate pegging, the market is artificially medicated. All of the rates and spreads are unreal. The yield curve is not market driven. Supply and demand for savings and investment, future inflation risk discounts by investors—none of these free market forces matter. The price of money is dictated by the Fed, and Wall Street merely attempts to front-run its next move. As long as the hedge fund traders and fast-money boys believe the Fed can keep everything pegged, we may limp along. The minute they lose confidence, they will unwind their trades. On the margin, nobody owns the Treasury bond; you rent it. Trillions of treasury paper is funded on repo: You buy $100 million (M) in Treasuries and immediately put them up as collateral for overnight borrowings of $98M. Traders can capture the spread as long as the price of the bond is stable or rising, as it has been for the last year or two. If the bond drops 2%, the spread has been wiped out. If that happens, the massive repo structures—that is, debt owned by still more debt—will start to unwind and create a panic in the Treasury market. People will realize the emperor is naked."

Stockton believes 2008 was a dry run of what happens when a class of assets owned on overnight money goes into a tailspin: there is a thunderous collapse.

2008 was one of those 'thunderous collapses' . It occurred in the repo market for mortgage-back securities, credit default obligations and such. Since then, the repo trade has remained in the Treasury and other high-grade markets because subprime and low-quality mortgage-backed securities are dead.

So does Stockton foresee another 'thunderous collapse'? And if so, how it could all unwind? What happens when the fast-money traders lose confidence in the Fed's ability to keep the spread?

"They are forced to start selling in order to liquidate their carry trades because repo lenders get nervous and want their cash back. However, when the crisis comes, there will be insufficient private bids—the market will gap down hard unless the central banks buy on an emergency basis: the Fed, the European Central Bank (ECB), the people's printing press of China and all the rest of them.

The question is: Will the central banks be able to do that now, given that they have already expanded their balance sheets?  The Fed balance sheet was $900 billion when Lehman crashed in September 2008. It took 93 years to build it to that level from when the Fed opened for business in November 1914. Bernanke then added another $900B in seven weeks and then he took it to $2.4 trillion in an orgy of money printing during the initial 13 weeks after Lehman. Today it is nearly $3 trillion. Can it triple again? I do not think so. Worldwide it's the same story: the top eight central banks had $5 trillion of footings shortly before the crisis; they have $15 trillion today. Overwhelmingly, this fantastic expansion of central bank footings has been used to buy or discount sovereign debt. This was the mother of all monetizations."

Following that path, what happens if there are no buyers? Do the governments go into default?

"The U.S. Treasury needs to be in the market for $20B in new issuances every week. When the day comes when there are all offers and no bids, the music will stop. Instead of being able to easily pawn off more borrowing on the markets—say 90 basis points for a 5-year note as at present—they may have to pay hundreds of basis points more. All of a sudden the politicians will run around with their hair on fire, asking, what happened to all the free money?"

Stockton sees this mayhem stretching into the private sector as well. Once the bond market starts unraveling, all the other risk assets will start selling off like mad.

"If the bond market goes into a dislocation, it will spread like a contagion to all of the other asset markets. There will be a massive selloff.

I think everything in the world is overvalued—stocks, bonds, commodities, currencies. Too much money printing and debt expansion drove the prices of all asset classes to artificial, non-economic levels. The danger to the world is not classic inflation or deflation of goods and services; it's a drastic downward re-pricing of inflated financial assets."

Stockton does not see any way to unravel this without this massive dislocation.

"The Fed is now at the end of a $3 trillion limb. It has been taken hostage by the markets the Federal Open Market Committee was trying to placate. People in the trading desks and hedge funds have been trained to front run the Fed. If they think the Fed's next buy will be in the belly of the curve, they buy the belly of the curve. But how does the Fed ever unwind its current lunatic balance sheet? If the smart traders conclude the Fed's next move will be to sell mortgage-backed securities, they will sell like mad in advance; soon there would be mayhem as all the boys and girls on Wall Street piled on. So the Fed is frozen; it is petrified by fear that if it begins contracting its balance sheet it will unleash the demons."

Stockton takes issue with the idea that the banking system was threatened in 2008 and needed Fed action.

"The banking system, especially the mainstream banking system, was not in peril at all. The toxic securitized mortgage assets were not in the Main Street banks and savings and loans; these institutions owned mostly prime quality whole loans and could have bled down the modest bad debt they did have over time from enhanced loan loss reserves. So the run on money was not at the retail teller window; it was in the canyons of Wall Street. The run was on wholesale money—that is, on repo and on unsecured commercial paper that had been issued in the hundreds of billions by financial institutions loaded down with securitized toxic garbage, including a lot of in-process inventory, on the asset side of their balance sheets.

The run was on investment banks that were really hedge funds in financial drag. The Goldmans and Morgan Stanleys did not really need trillion-dollar balance sheets to do mergers and acquisitions. Mergers and acquisitions do not require capital; they require a good Rolodex. They also did not need all that capital for the other part of investment banking—the underwriting business. Regulated stocks and bonds get underwritten through rigged cartels—they almost never under-price and really don't need much capital. Their trillion dollar balance sheets, therefore, were just massive trading operations—whether they called it customer accommodation or proprietary is a distinction without a difference—which were funded on 30 to 1 leverage. Much of the debt was unstable hot money from the wholesale and repo market and that was the rub—the source of the panic. Bernanke thought this was a retail run à la the 1930s. It was not; it was a wholesale money run in the canyons of Wall Street and it should have been allowed to burn out."

And when the inevitable unwinding of the Fed and the bond markets comes, it won't put the banking system back in peril. The people were lied to in 2008. And when unwind comes, when the next crisis starts, Stockton believes we will "see torches and pitch forks moving in the direction of the Eccles building where the Fed has its offices."

Stockton also believes that moment is closer than most people think.

"On Dec. 31, the tax cuts will expire, defense cuts go into place and we hit the debt ceiling. That will be a clarifying moment; never before have three such powerful vectors come together at the same time — fiscal triple witching.

First, the debt ceiling will expire around election time, so the government will face another shutdown and it will be politically brutal to assemble a majority in a lame duck session to raise it by the trillions that will be needed.

Second, the whole set of tax cuts and credits that have been enacted over the last 10 years total up to $400 – 500B annually will expire on Dec. 31, so they will hit the economy like a ton of bricks if not extended.

Third, you have the sequester on defense spending that was put in last summer as a fallback, which cannot be changed without a majority vote in Congress.It is a push-pull situation: If you defer the sequester, you need more debt ceiling. If you extend the tax expirations, you need a debt ceiling increase of $100B a month.

Congress will extend the whole thing for 60 or 90 days to give the new president, if he hasn't demanded a recount yet, an opportunity to come up with a plan.

To get the votes to extend the debt ceiling, the Democrats will insist on keeping the income and payroll tax cuts for the 99% and the Republicans will want to keep the capital gains rate at 15% so the Wall Street speculators will not be inconvenienced. It is utter madness.

If the debt ceiling is raised again, defense purchases and non-defense purchases will be hit with brutal force by the sequester. As we go into 2013, there will be a shocking hit to the reported GDP numbers as discretionary government spending shrinks. People keep forgetting that most government spending is transfer payments, but it is only purchases of labor and goods that go directly into the GDP calculations, and it is these accounts that will get smacked by the sequester of discretionary defense and non-defense budgets.

In this environment unemployment numbers will soar.

So in the midst of this volatility, how can normal people preserve, much less expand their wealth?

"The only thing you can do is to stay out of harm's way and try to preserve what you can in cash. All of the markets are rigged or impaired. A 4% yield on blue chip stocks is not worth it, because when the thing falls apart, your 4% will be gone in an hour."

But if the government keeps printing money, won't cash be rendered worthless too?

"I do not think we will have hyperinflation. I think the financial system will break down before it can even get started. Then the economy will go into paralysis until we find the courage, focus and resolution to do something about it. Instead of hyperinflation or deflation there will be a major financial dislocation, which means painful re-pricing of financial assets.

How painful will the re-pricing be? I think the public already knows that it will be really terrible. 

My investing model to deal with all of this is ABCD: Anything Bernanke Cannot Destroy.

And if you read this blog regularly... you know the the tangible items Stockman is referring to.

Primarily Gold and Silver.

But you knew we were going to end up with this, didn't you?

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The Pressure builds

Yesterday we noted how the evaporation of HAM (and with it the strong Spring Real Estate market sales) was finally gaining recognition in the mainstream media.

Even local condo King Bob Rennie chiimed in:

Prominent condo marketer Bob Rennie said the high-end house prices in west-side Vancouver were so out of line with the rest of the region and country that it was skewing people’s perceptions of real-estate increases, not just in Metro Vancouver, but in all of Canada.

“In 2010, reports were saying real estate went up 8.9 per cent in Canada. But if you took out Vancouver, it only went up 4.3 per cent,” he said.

The spike in west-side house prices the last two years has provoked intense media coverage – with one Bloomberg News story in late May headlined, Chinese Spreading Wealth Make Vancouver Homes Pricier Than NYC – and debate among residents, politicians and commentators both here and abroad.

Much of it was attributed to “mainland Chinese” buyers, although no one had hard overall numbers to support that. Nor could anyone say whether that group might be 100 or 1,000 people, or whether they were truly offshore investors or immigrants. But that didn’t stop arguments about the need to limit foreign ownership or to tax speculation to prevent the nebulous phenomenon.

A number of realtors said early signs started appearing six months ago that the market was slowing down, but the difference really appeared in early March. There is usually a surge of buying in Vancouver around Chinese New Year, as visitors from China come to see family or friends in the city and often make decisions to buy.

The absence of sales is being magnified by the burgeoning number of listings... a theme we have been tracking with interest in our sidebar.

And the explosion in listings is the early theme for the month of May.

• On May 2 we saw an increase in total listings of +121 
• On May 3: +157
• On May 4: +192
• And today, May 7: +135

While it is early in the month, the current Inventory increase pace is at a blistering +150 per day.

Over on the blog Vancouver Condo Info, one contributor (who goes by the post moniker 'Inventory') advises that detached home sales year to date on the west side of Vancouver are down a stunning -48%.  On the east side of Vancouver detached home sales are down -38%.

The suburbs aren't faring any better.  South of Vancouver is taking a big hit as well.

In Ladner detached home sales are down year to date -43%. In Tsawwassen they're down -47%. Richmond is down a stunning -53%.

To the immediate east of Vancouver... Burnaby East is down -34%, Burnaby North is down – 42% and Burnaby South is down -46%.

Even the City of West Vancouver is down -52%.

Everywhere it seems listings are soaring and sales are tanking.

Will we see prices start to move?

We have profiled a few examples in the past and hopefully later this week we can show some more.

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The media says... HAM is "fizzling out"

So I was sitting in a cafe near Canada Place this morning with a group of 'friends of friends' who had just finished running the Vancouver Marathon (or in their case... the half marathon) and the topic turned to real estate.

One astute member for the 'friends of friends' clan was explaining to a colleague about why downtown condo prices, which have been falling recently, will continue to fall.

Our table was long, but my ears had not deceived me. The bear case was being eloquently laid out!

Listening in, my heart shone as this learned individual explained the current market dynamics.

It wasn't long before your faithful scribe chimed in about the impending OSFI changes to LTV mortgage renewals to complete the discussion when he turned and said, "ah... so you know all to well what's going on!"

Indeed... and clearly I'm not alone as one glance at the weekend papers indicate enlightenment isn't just occurring in local cafe's.

For several years now this, and other blogs, have ruminated that the phenomena of HAM (Hot Asian Money) was not a panacea to the everlasting inflation of our housing bubble.

And as the Spring market fails to materialize, it becoming very evident to all that Chinese buyers are not going to save the market.

It's so evident that even the local newspaper columnist Frances Bula is now writing about it.

Bula writes that the:

"boom of sky-high prices for Vancouver west-side houses – one that provoked media around the world to claim with scant proof that mainland Chinese investors were buying up the city – is fizzling out."

Bula notes that a house in the 3000 block of West 24th Anenue, first listed at near $4.5-million six months ago, sold on April 15 for $3.35-million, over $1 million chopped off the asking price.

Fresh statistics from the Greater Vancouver Real Estate Board show the number of sales on the west side is down by nearly 40% for the first four months of the year. Only a third of the nearly 400 homes listed in April have sold – one of the lowest rates in the region.

And Bula quotes west-side realtor Marty Pospischil, who specializes in selling single-family homes owned by long-term residents, who says that last year, 90% of his 100 house sales were to “offshore buyers”. This year, it’s less than a tenth of that.

Pospischil also noted:

“We’re now seeing a 50% collapse rate in deals, when it’s usually more like 5%.”

The reason?

In addition to the lack of money flowing from China, there is another factor hitting sales hard.

“Banks are now requiring borrowers to disclose incomes and assets before mortgages are approved, as of the last six weeks.”

Meanwhile Bula quotes another west side realtor, who specializes in single family homes. He notes:

“I always thought that market was not sustainable. Every local person was juiced out of the market. The average household income on the west side doesn’t support those prices.”

Wow!

Not that we haven't been saying the exact same thing.

But to see these types of headlines coming from mainstream media in the Vancouver real estate scene, it tells you this is a market in trouble.

For if HAM is evaporating, mortgage rules are tightening and local incomes can't support the current bubble prices; it means there is only one way the market can go.

As long time residents painlessly slash $1 million dollars off those sky high prices for homes they only paid $60,000 to $80,000 for back in the mid-1970s, you have to wonder how long before the free-fall in prices starts?

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The smell of desperation?

Faithful readers will recall posts we made at the end of March about the Marine Gateway development in south Vancouver.

It garnered notoriety as the first pre-sale condo sellout in Vancouver in over six years... an odd occurrence considering the slowing market conditions.

Even stranger was the fact that media reports documented less than 150 people in line for the sellout of 415 units in four hours.

It prompted us to wonder aloud if the Marine Gateway development hadn't fallen prey to the common industry practice whereby the marketer responsible for hawking the development strikes a deal with realtors who want to be exclusive agents to sell in the complex.  These realtors often have to pick up 5 to 10% of those options each. Once the complex is finished and all the developers suites are sold, then these realtors can sell theirs.

It means that these exclusive agents could actually be responsible for buying up to half of the pre-sales condos made available to the general public.

Did this occur at Marine Gateway? 

Is this how an estimated 130 people in line triggered a sell out of 415 units in a record four hours? Was it because these exclusive real estate agents secured half of the units (and the best ones at that... those which came with some of the limited parking spots and are the best candidates for future resale)?

Is this why, as noted on Global TV, those buyers who did actually line up early were disappointed they could only secure 1 bedroom condo units, units that were part of the contingent that came without an available parking spot?

The Marine Gateway sellout generated much needed R/E hype for the 'developments on rapid transit line' theme.

As we noted, Rennie Marketing Systems was launching a whole new theme which shifted the mantra of "location, location, location" to one of "transportation, transportation, transportation."

We observed that in the months ahead, Rennie would be expanding on this theme as he went to market with 3 more developments along the rapid transit system:

• A pre-sale of 300 units he will launched next month at another Canada Line Station - Brighouse Station in Richmond,
• a pre-sale of 230 units he will launch in September at Coquitlam Centre on the new Evergreen Line line .
• And a month after that 1,100 units, two towers, will go to market along the original Skytrain line in Vancouver at Joyce Road.

Well fast forward over a month.  

The first of those upcoming developments, the pre-sale of 300 units at another Canada Line Station - a development known as Mandarin Residences, has come and gone... with little fanfare.

According to the title page on their website (click on image to enlarge) only 203 of the 300 units pre-sold on opening weekend... a far cry from the instant sellout at Marine Gateway:

I wonder how many of those 203 'sold' units were assigned to the exclusive realtors at Mandarin Residences?

If half of the 300 units went to realtors (150 units), could it be that less than 50 units actually sold to buyer's/investors?

Is this why Global TV wasn't invited to cover that pre-sale?

I raise this question because if as few as only 50/300 units actually sold, then it would be desperation time with those 'exclusive realtors'.

And just how desperate might they be?

Would they be so desperate to as to beat the bushes of the internet to shill their condo in the comments section of a bear blog such as this one?

May I draw you attention to a comment made today as part of a recent Richmond post on this blog (click on image to enlarge):

The comment links to the website of the Mandarin Residences.

Normally I delete shill comments which link to this product or that one. But this one I'll leave up.

Take a wiff of it and remember the smell.

I'm pretty sure THAT's what desperation smells like.

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Blindsided?

Sigh.

Everywhere you look these days, it seems the media is screaming about the housing bubble.

The latest is CBC who tell us the Canadian housing market is overpriced and bubbly in many areas.

Meanwhile real setae sales data from Vancouver is just plain ugly.

Listings are shooting upward and sales are slowing dramatically. Sales for April 2012 are down 13.2% from April 2011. They dropped 2.6% from the March 2012 total, a month which was down 29.6% from March 2011.

Detached home sales are down 19.7% and the average single family house price has plummeted by $100,000 so far this year.  The surprising gain of last month has been quickly and suddenly wiped out as you can see in realtor Larry Yatkowsky's graph (click on image to enlarge):

The always strong 'Spring Market' is a complete no show.

Garth Turner reports that in the Vancouver suburb of Richmond over 75% of property deals are now going for less than the assessed value. Says Turner:

Forget bidding wars. This is becoming a realtor graveyard. Suddenly owners are doing what always happens in a market dive – realizing their paper profits will turn vaporous if they don’t cash out. Listings rise, sales don’t and prices fade – the classic vicious cycle.

But despite all the media hype, the average joe on the street is still oblivious to what is going on.

In the US, when the real estate bubble burst, many real estate investors found themselves blindsided. When everything fell apart, they never saw it coming.

Chatting with a few people today... despite all the media attention, so many are going to get blindsided by what's coming.

No one wants to see it.

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Frontline - Money, Power and Wall Street: All 4 episodes

Called one of the most complete documentaries undertaken on the financial crisis, PBS Frontline's "Money, Power, & Wall Street" series stretches from the origins of the credit derivative business with a bikini-clad pool-side Blythe Masters and her JPMorgan colleagues to the scary (but absolutely true) fact that the financial crisis never ended.

Episode One: Derivatives Spark a Credit Boom and the Mispricing of Risk.

Episode Two: Systemic Risk. Bear Sterns collapses; regulators fear its effect on the financial system.

Episode Three : Obama inherits a crisis. The President elect faces a crucial decision - Who would serve on the economic team?

Episode Four: Everybody was making money. Despite the crisis, nothing seems to have really changed the culture of Wall Street.

Watch Money, Power and Wall Street: Part Four on PBS. See more from FRONTLINE.

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Doomsday Defined?

It's been an intriguing week that was for those who follow the trials and tribulations of our real estate bubble in Canada.

If you missed it, there was a stunning development last week that has rocked the industry.

In a series of interviews, Finance Minister Jim Flaherty shocked everyone in R/E by alluding to far-reaching changes to the foundation of Canada’s housing market.

And the website Canadian Mortgage Trends (CMT) had a great post which summarizes the issue.

CMT notes that for 58 years, the Canadian government has offered mortgage default insurance to qualified Canadians. The idea has been to make homeownership more accessible, which in turn bolsters the broader economy. Now, the government’s direct support of that insurance is in question as Flaherty came out and said:

“Over time, I don’t think it’s essential that a government financial institution provide mortgage insurance in Canada. I think what’s key is that mortgage insurance is available at a reasonable cost in Canada. I think there is a role to regulate but whether we, the Canadian people, have to be the owners and shareholders of a financial institution to do this is a question. I don’t think it’s essential in the long run.”

CMT observes that Flaherty, with his comments, has put the government’s support of housing finance in doubt.

CMT then goes on to defend the status quo and I'll let you check out their article at your leisure.

There was, however, a stunning statistic that caught me eye near the end of the post.

CMT notes that, according to CMHC’s stress tests, a chilling statistic is revealed. CMT observes:

"As of Q3 2011, CMHC had $17.4 billion in capital set safely aside to cover claims. In a doomsday scenario, CMHC sources have assured us that it could handle obscene prime default rates on the order of 3.00% or more."

Now... CMT hastily downplays this statistic by saying that a 3% default rate is "three times the all-time high of 1.02% in 1983, which occurred after a year when fixed mortgage rates averaged 17.89%." Hence how they come to believe a default rate of 3.00% as 'obscene'.

Somehow that's supposed to make things alright.

But there's one small problem. When mortgage rates averaged 17.89% in 1983, the average mortgage was around $40,000 - $50,000. And the most recent average homes selling in the market were going for around $100,000 (and none of them for only 5% down or an amortization more than 25 years)

Much of the debt taken on during the late 1970's was acquired during a period when rates were over 15%. People KNEW what they were getting into.  Those that had problems were those who got trapped renewing their mortgages around the time rates topped out at 22% (yes... people had to renew a mortgage at 22%!).

The real takeaway is this: A DOOMESDAY scenario today is considered a default rate on the order of 3.00% or more. And any scenario under consideration where defaults reach 3.00% is classified as so unlikely that number is called 'obscene'.

Hmmm. Allow me, faithful readers, to draw you attention to Garth Turner's blog post today., He notes that currently "there are 220 foreclosures on the market in Edmonton alone, or about 5% of active listings."

Recall a post I made recently about The Boomer Trigger. 70% of Boomer's do not have adequate funds set aside for retirement.  Their plan is to sell their bubble inflated real estate, downsize and live on the difference.

The Boomer advantage in the current stagnating Vancouver market is that if they tire of waiting for their property to sell at current bubble rates, they can dramatically slash their asking price and still realize an acceptable profit.  The Boomer Trigger post profiled one such example where a seller knocked almost $1 million off his $2.3 million asking price.  In that he probably only paid $60,000 for the house in the mid 1970s, it wasn't a problem.

The new blog, Vancouver Price Drop, profiles another example of The Boomer Trigger.

This house, at 5638 Crown Street on the west side of Vancouver, is currently for sale:

On March 09 it was listed for $2,398,000 (MLS listing V934064).

On March 13 the listing price was dropped $100,000 to $2,298,000.

On April 04 it was cut to $2,248,000, chopping another  $50,000 off the asking price.

On April 13 another $50,000 was chopped off the asking price (now $2,198,000).

On April 23rd the listing was revoked and on April 25 the house was relisted for $2,150,000 (MLS listing V945487) and another $48,000 was taken off the original March 09 asking price.

Three days ago, on April 27, the price has been reduced again. It has come down to $1,988,000, a drop so far of $410,000 from the initial asking price.

In total it's 17% off the original asking price in less than 2 months.

Now, it's clear the sellers set the price to high to start.  But the price they choose was consistent with what homes had (and 'had' is the operative word here) been selling for in the neighbourhood.

But with all the bubble collapse talk going on (combined with the over 70% increase in available listings since the start of the year), the sellers are clearly very worried.

The number of price changes in a short period of time shows their desperation (hence the reason the listing was pulled and a new listing put out... an attempt to hide the desperation).

And the fact of the matter is... they can accept a much lower price.  It's the Boomer advantage. Accepting an offer at this point that shaves another $500,000 off the asking price is not out of the question.

Meanwhile all those who bought at those lofty prices in the past year, they have just seen their 'investments' evaporate by 17%.  And this trend will only pick up steam.

Later this year, new regulations being enforced by the OFSI (the banking regulator) will require loan to value ratios (LTV) being enforced when mortgages are renewed.

If "doomsday" is only a 3% default rate, it's not hard to see the grim reaper appearing on the horizon.  

Because if this trend gathers steam, the Boomer Trigger will leave a huge number of people who bought in the last 5 years massively underwater.

And they simply won't be able to renew their mortgages under an OFSI strictly enforced LTV ratio requirement.

If this were to come to pass, a default rate of only 3.00% would be a godsend.

We continue to watch with... (dare I say it?)... obscene fascination.

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Historical Perspective

The Globe and Mail newspaper came out with an article today the encapsulates what many bear bloggers have complained about.

Primarily how Governor of Canada Mark Carney's debt warnings are at complete odds with the monetary policy he is following.

The Globe notes how Carney, for years now, has used ultra-low interest rates to flood the financial system with easy money.

That policy kept Canadians buying homes while markets elsewhere in the world faltered.

The conventional wisdom has been that keeping those emergency low interest rates in place has been a risk worth taking, given the weakness in the non-housing side of the economy.

But as it becomes clear that it's entirely possible that Canada’s housing crash wasn’t avoided, but merely postponed, the Globe wonders whether history will be kind to the Bank of Canada Governor?

Carney is being heralded around the world. He chairs the Financial Stability Board, tasked with reforming global financial institutions.

He’s whispered as a candidate to head the Bank of England.

Wherever he goes, people laud him for saving Canada from the worst of the global financial crisis. On Tuesday, the Canadian Club honours him as “Canadian of the Year.”

But this adulation, as the Globe notes, can quickly shift as it did for the former Chairman of the US Federal Reserve, Alan Greenspan.

When Greenspan retired from the U.S. Federal Reserve in 2006, he looked like a genius. He had steered the world’s largest economy through the dot-com bust, 9/11 and a recession. All was good as the economy roared.

But two years later, with the U.S. housing bubble bursting and the financial crisis raging, Greenspan’s reputation was substantially diminished. His failure to see the mortgage lending bubble – and do anything about it – is now etched in his legacy.

A rattled Mr. Greenspan later admitted his faith in the financial system was shaken.

If Canada’s housing market crashes, will Canadians look back on all his verbal warnings over the past few years about debt?

Or will he be judged on the monetary policy he kept in place as his warnings fell on deaf ears?

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Thurs Post #2: Now it's the Royal Bank warning of a correction!

Canada's largest bank, Royal Bank, has now joined the chorus of real estate doomsayers by coming out and proclaiming that the Vancouver housing market is vulnerable to `significant downturn'.

Robert Hogue, senior economist at RBC,  says there are fundamental factors supporting what he acknowledges is a "volatile" market.

In an RBC report Hogue wrote that prices are expected to decline for two key reasons: high prices and the dependence on wealthy foreign investors.

Hogue says these factors:

"... make the Vancouver-area market more vulnerable to a significant downturn than other Canadian markets if an unfavourable economic scenario or unforeseen shock (such as a change in China's policy regarding capital outflow) were to unfold. The constant flow of wealthy buyers coming from abroad is poorly documented, leaving the dynamics of the city's market rather opaque and opening up the possibility that critical market developments could be missed. For this reason, and the fact that the extremely poor affordability levels, quite frankly, make us uncomfortable, we urge caution."

Tsur Somerville, director at the University of B.C. Centre for Urban Economics and Real Estate at the Sauder School of Business, is often chided by bear bloggers for his pro-bull market analysis. But even Somerville is changing his tune.

"Were the inflow of capital from immigrants and investors to dry up or be reduced, that would put downward pressure on housing prices."

Somerville wouldn't predict how much prices would drop but did say;

"I have no idea and given what we don't know, you can't really model the market. It's very hard to figure out what's going on in the Vancouver because there are all kinds of don't knows. We don't know how many of those buyers are foreign buyers, you don't know how many are strict investment, you don't know how many are permanent residents, and you don't know how many are occupying their units."

How's that for turning on a dime? Sommerville out and out admits you really can't model the Vancouver market.

Perhaps he should stop allowing himself to be quoted as an expert on the subject, then. But I digress.

Hogue, who hedges his comments by hesitating to call for an out and out collapse, does note that the market is subject to "extreme unaffordability" and says that a typical Vancouver-area homebuyer would need to spend 92% of their income to carry the costs of a two-storey home, and as much as 45%of their income for a condo.

That this market will correct, and correct significantly, is gradually becoming obvious to anyone who doesn't let hope cloud observation.

Can you see clearly yet?

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Frontline - Money, Power and Wall Street, Part 2

Watch Money, Power and Wall Street: Part Two on PBS. See more from FRONTLINE.

Episode Two: Systemic Risk. Bear Sterns collapses; regulators fear its effect on the financial system.

In this episode FRONTLINE investigates the largest government bailout in U.S. history, a series of decisions that rewrote the rules of government and fueled a debate that would alter the country’s political landscape. It offers play-by-play accounts of several secret meetings that permanently altered the financial system.

FRONTLINE finds plenty of blame to go around (Goldman Sachs and CEO Lloyd Blankfein take a particular bruising), but is most devastating in its dissection of the chummy collusion between bankers and the government leaders who should have been watch-dogging them.

Episode Three & Four will be released and posted here on May 1 & 2, 2012.

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Wed Post #2: Even more Carney warnings on interest rates

Bank of Canada (BoC) Governor Mark Carney used an appearance at the House of Commons finance committee to re-stress the central bank’s recent message that rates could have to go up despite global economic uncertainty.

The BoC, which has kept rates at a near-record low of 1% since September 2010, started mentioning last week that a rate increase might be needed because of a stronger economy and underlying inflationary pressures.

More intriguingly, Carney touched base on the real threat lying underneath the surface in Canada.  He stressed Canadians cannot keep borrowing so heavily against the value of their homes.

He said financial authorities were looking closely at levels of household debt and ways to contain the problem.

He also made it clear that too tight a clampdown could hurt economic growth.

So what is to be done?

“Authorities — the bank, the superintendent, CMHC, Government of Canada — are cooperating closely and monitoring the situation … there had been a number of measures that had been taken both by the superintendent, by the government. We have a heightened vigilance with the underwriting practices of the banks. So on a supply side there are a variety of measures that have been taken and are resulting in a slowing of the accumulation. There’s always more that could potentially be done. But these measures, there has to be an element of prudence in balancing the pace of slowing of this phenomena with the underlying growth of the economy.”

Many will howl in protest that Carney is being too slow to turn the taps off.

He knows the damage that is going to be caused and he is trying to cushion it as best he can.

But can you really engineer a soft landing?

I guess we're going to find out.

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Wed Post #1: Frontline - Money, Power and Wall Street, Part 1

Watch Money, Power and Wall Street: Part One on PBS. See more from FRONTLINE.

Episode One: Derivatives Spark a Credit Boom and the Mispricing of Risk.

A MUST watch Frontline special explaining the role of derivatives. Faithful readers will recall that Warren Buffet has called these derivatives "financial weapons of mass destruction."

Episode Two will be posted tomorrow.

Here is a summary of what this is about:

In 1994, a team of young, 20-something JPMorgan bankers on a retreat in Boca Raton, Fla. dreamed up the “credit default swap” — a complicated derivative they hoped would help manage risk and stabilize the financial system. Fourteen years later, they watched in horror as that global system — weighed down by the risk of credit default swaps tied to morgtage loans — collapsed.

The ensuing saga between that pivotal retreat and the start of the 2008 global financial crisis are “defined by daunting complexity,” writes Greg Evans in Bloomberg Businessweek today. But the first two hours of Money, Power and Wall Street, he adds, does an “exemplary job of walking viewers through [it].”

FRONTLINE’s four-hour epic on the global financial crisis goes inside the struggles to rescue and repair a shattered economy, exploring key decisions, missed opportunities and the unprecedented and uneasy partnership between government leaders and titans of finance.

“Money, Power and Wall Street is demanding — this isn’t Finance for Dummies,” Evans writes in the review. “But it’s a compact and thorough lesson.”

In the first hour, FRONTLINE takes you inside the rapid rise of credit default swaps, including the voices of those who created them. With the real estate market booming, bankers successfully tweaked the credit default swap to bundle up and sell home mortgage loans to eager investors. But despite the money flowing into banks’ coffers, credit default swaps also loaded the financial system with lethal risk. And when the housing bubble burst, the credit default swaps — originally designed to stabilize the system — brought the global economy to its knees. Regulators, who had often stood on the sideline and allowed Wall Street to police itself, saw the ugly consequences rapidly unfold before them.

In the second hour, FRONTLINE investigates the largest government bailout in U.S. history, a series of decisions that rewrote the rules of government and fueled a debate that would alter the country’s political landscape. It offers play-by-play accounts of several secret meetings that permanently altered the financial system.

“The program feels fresh and vivid — and takes no prisoners,” writes Evans. “FRONTLINE finds plenty of blame to go around (Goldman Sachs and CEO Lloyd Blankfein take a particular bruising), but is most devastating in its dissection of the chummy collusion between bankers and the government leaders who should have been watch-dogging them.”

As mentioned above, we will have Episode Two posted here tomorrow.

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Tues Post #2: Richmond continues to struggle - but not according to the mainstream media

Was it only January 2011 when we were comparing the red hot real estate market in the Vancouver suburb of Richmond to Holland's historic Tulip Mania?

Then came the Tsunami in Japan and as we predicted, Richmond was about to undergo a massive Paradigm shift.

Richmond has gone from a sellers market to a market where inventory is building up in a massive way.

In fact it was that growing inventory that prompted one seller we profiled to accept an offer almost $1 million lower than his asking price (an amount which was 40% less than that original asking price) in order to sell in that stagnating market.

And make no mistake, Richmond is stagnating.

As VREAA noted two days ago,  Richmond inventory has hit all time highs. Richmond detached home inventory is now over 1,021 homes available for sale.

It's been a deadly combination... increasing inventory and sales which have continued to tank month after month.

According to Richmond Realtor James Wong, the total number of homes sold in March, 2012 came in at a paltry 309 units, a drop of 5% from the total number of sales in February (324).

The total number of detached homes, townhomes and condos/apartments listed for sale at the end of the month totaled 2,330 units, an increase of 11% from February's total inventory of 2,100.

Wong pointed out the silver lining when he noted that the supply of homes in Richmond at the end of March resulted in an Months of Inventory total of 8.24 months, a slight decrease compared with the previous months figure at 8.82 months of inventory.

But the problem is that the overall supply of detached homes, townhomes and condos increased those listings overwhelmed the increase in sales.

And while Wong tries to spin the positive on the news at the end of his report, bear blog followers pass on a different story entirely.

VMD tells us:

“There are more and more people over at the Chinese [internet] forums reporting price drops in their neighborhoods (be it Richmond condos or Coquitlam SFHs). More people are voicing their skepticism that Vancouver RE market will continue to go up. Many already accept the view that Van RE price will decline at least a couple % this year.

People are noticing the glut of thousands of upcoming Richmond condo units, and are advising against buying at this time. A few people are saying their close/trustworthy Chinese Realtor friends are saying the RE market isn’t looking good; however the other Realtors (whom they’re not close to) are still trying to paint a rosy picture.

Sentiment is changing, even among the HAM.”

Of course don't let all these 'facts' get in the way of believing in the future of the real estate in Richmond.

And naturally it's the Vancouver Sun who leads the cheerleading charge.

Recently the Sun provided us with 24 Reasons Why Richmond Real Estate is Booming.

Booming?

You simply can't make this stuff up.

So here, for your entertainment purposes, are the Vancouver Sun's top 24 reasons Richmond real estate is 'booming':

1. ASIAN INVESTMENT: With a mountain of money trying to get out of Hong Kong and china in expectation of economic collapse, the stability of Richmond real estate has drawn many investors to purchase property sight unseen. Reports of tour buses being taken from property to property, and strangers offering briefcases filled with money at the door are no longer uncommon.
2. SPORTS FACILITIES: Richmond has invested in all-weather sports facilities at a variety of local parks, as well as the much-hyped Richmond Olympic Oval, which hosts a wide array of sporting events, both amateur and professional.
3. SALMON: If you like fresh salmon, being able to walk down to the fishing boats and buy it fresh out of the water is a big plus.
4. BEDROOM COMMUNITIES: While Richmond has a reputation as an Asia-centric area, there are a growing number of communities that are entities all to themselves. The cultural contrast between Richmond Centre and Steveston couldn't be any starker, #5 Road's 'highway to heaven' presents a community of different communities, there are Ukrainian enclaves, Asian suburbs, spillover New West suburbs, and a growing number of young urban professionals around the Canada Line. The River Green development by the Olympic Village will be a small city of its own when it's completed.
5. SUMMER FUN: On summer weekends, thousands of people invade Richmond to take part in events, amateur sports, walk the docks and buy fresh fish.
6. FOOD SECURITY: Richmond is the last place in Metro Vancouver where food is locally grown in commercial quantities.
7. PLENTY OF DEVELOPMENT: Richmond's city council has a reputation for being developer-friendly, recently having allowed the construction of B.C.'s first wood-constructed six storey apartment building, which was consumed by fire before it could be completed.
8. THE DAILY MASSEY TUNNEL JAM: While home prices in nearby areas such as Ladner and Delta are comparably inexpensive, the dependence of commuters on having to make it through the Massey Tunnel during peak hour is a big turn-off for many.
9. THRIVING ARTS SCENE: From the often-photographed derelict houseboats of Finn Slough to the gigantic heads on display at Lansdowne Centre as part of the recent Biennale, to movies on the beach at Gary Point, to packed houses at the Gateway Theatrem Richmond has formed a growing local arts scene that fees the cultural needs of locals and immigrants alike.
10. GEOGRAPHY: The simple fact of it is that nobody is producing new land in the city of Vancouver. The only way to build is up, which means there's a high spillover into areas like Richmond. With Surrey and Burnaby still fighting the stigma of being seen as working class cities, Richmond's increasingly big money has helped it shed the tag of an immigrant town.
11. FOOD! Lovers of fine food have a lot of munchie options in Richmond, from some of the best Chinese restaurants in the world to hip new modern eateries.
12. LOW PETTY CRIME/HOMELESS RATES: While there's certainly crime and homelessness in Richmond, the numbers are far lower than elsewhere in Metro Vancouver, especially downtown.
13. THE CANADA LINE: A new Skytrain line directly into the heart of Richmond has spearheaded much of the recent development in the city, giving commuters a way into downtown Vancouver in 25 minutes while residents of Coquitlam, Langley and Delta find themselves often fighting bottlenecked traffic.
14. PARKS AND TRAILS: Walking the dyke is a regular go-to outdoor activity for Richmondites, but with Richmond Nature Park, Garry Point, and Terra Nova as places to go to get away from it all, it's easy to get intentionally lost in nature south of the airport.
15. CLIMATE: While Richmond gets as cold as anywhere else in Metro Vancouver during the winter, it generally receives less snowfall, less rain, and much less smog than other parts of town, due to the jet stream coming directly off the water, rather than over the Lions.
16. ABUNDANCE OF TEAR-ME-DOWNS: There are plenty of homes in Richmond that were built on the cheap in the last forty years, with no architectural appeal and large lots. These can usually be easily demolished and turned into townhomes or large modern family homes with little local protest, whereas similar development in Vancouver can be frought with bureacratic impediments.
17. OLYMPIC EXPOSURE: Having Richmond shown to hundreds of millions of people around the world during the recent Winter Games has given the city no end of interest from companies and immigrants looking to move somewhere new.
18. OPEN SPACE: Though much of it is listed under the ALR, Richmond has no shortage of open space that can be (and often is) turned into developed land. The infamous Fantasy Gardens was recently bulldozed to make way for a new development at Ironwood, which is one of Richmond's thriving new communities.
19. AVAILABILITY OF PURCHASE OPTIONS: Recent development in Richmond has vastly increased the real estate inventory available to prospective buyers, with waterfront views and modern facilities being a big draw.
20. COMMUNITY EVENTS: Weekend festivals such as the Ship To Shore tall ships event give locals a regular diet of things to do that cost little or no money. The annual Children's Festival, regular musical events and summer outdoor movies add to the fun.

Now keen observers will note this is only 20 reasons from a list that was supposed to provide 24.

Where are #'s 21, 22, 23, and 24?

Unfortunately if you follow the link above and click your way through the '24' reasons, you will discover that there are only 20 listed.

Presumably the last four are a take on the Location, Location, Location mantra.

In this case it would be... Gullible, Gullible, Gullible Gullible. Because that's the only way to describe the mindset that believes these factors off set the reality that is occurring in Richmond.

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