Saturday, June 20, 2009

Immaculate Resuscitation?

A few weeks ago I wrote about our governments desperate attempt to resecusitate the housing market by slashing interest rates to near zero (0.25%).

Fearful of the reprecussions of a housing collapse triggering the same sort of economic devestation as is being witnessed in the United States, a full court press had been launched by government, media and the real estate industry to get people buying again; to stall or reverse the decline in housing prices.

And it has worked.

Lured by a belief that homes are now 'affordable', people are lunging at the low mortgage rates and buying houses with a frenzy again.

This week Bank of Montreal Nesbitt Burns senior economist Michael Gregory trumpted that the worst of real estate slump in Canada is over!

"The worst of Canada's recession occurred through December and January of this year. Things were looking really bleak. It caused people to be cautious. Now, thanks to low mortgage interest rates and a slide in prices buyers are more confident."

Bidding wars for properties are even returning. A work collegue passes on how one west side Vancouver home he was involved in restoring was listed and sold within the week for $100,000 over asking price.

"It's crazy," he said. "It's as if the boom times have returned."

In an article in today's Globe and Mail, Garth Turner comments on this phenomenon and calls it, "The housing bubble, Part Two."

Turner sees the same things I have been ocmmenting on this past week.

“It’s all happening because of the crack cocaine of housing, which is rock-bottom interest rates,” said Garth Turner, author of Greater Fool: The Troubled Future of Real Estate. “They’re so irresistible, especially to inexperienced first-time buyers. That’s what’s propelling the market.”

In the near term Turner sees rising rates being used to get buyers to jump into the market immediately. “People are being told, ‘Your affordability is going down if you don’t buy now, you’re going to be forever shut out of the market.’ It’s the eternal siren song of real estate.”

And it's the return of the 'buy-now-or-be-priced-out-forever' mantra that is so scary. People are borrowing mortgage money to buy homes in a panic, at record prices. They are not investing, they are renting debt.

It takes 70% of disposable income for the average Vancouver family to carry the average home. That is not sustainable. You should never allow your home purchase to constitute more than 40% of your net worth, nor should you buy anything other than a distressed property in this market.

We are back to a time where delusion has replaced logic and the stage is being set for a massive body blow to the real estate market.

Just like the city itself, the Vancouver Real Estate market is perched on a massive fault line.

It will rupture. And when it does, it will not be pretty.


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  1. Resecusitation?
    May be you meant "Resuscitation" ?

  2. Lol... yes, that's what I meant. Thank you.

  3. Thanks again for the great posts. This story (the continued maintenance of these inflated real estate values) is getting frustrating as an observer, and as someone that ultimately would like to get into the market when the fundamentals make sense. At the end of the day, when the price of housing is so expensive relative to the incomes of the people that live and work in the have a problem. It seems like these ridiculously low interest rates are delaying the inevitable.

  4. The entire premise of the low interest rates is to stall/stave off continued declines in the hope that the economy can be resuscitated. It is the natural reaction of people to protect what they have (and thus the natural reaction of governments). Unfortunately we live in a capitalist oriented system, and the nature of that system is to tear down what isn't working and allow capital/resources to redeploy. When it happens it is a very painful, but necessary, process. And it takes the extraordinary politician to allow it to happen. Regrettably a politician that facilitates it will probably fail to win re-election. Thus we have politicians who meddle and that meddling often exacerbates the situation. It will make the fall all the harder and sharper when it comes.