Friday, December 4, 2009

Outside... looking in.

Came across a comment posted over at the blog Vancouver Condo Info that is worth reading.

It was posted by 'San Franciscan in Vancouver' and gives you an idea of just how crazy things look from the point of view of an outsider.

  • I can’t help but just laugh my guts out about what is happening in this town (Vancouver), province (British Columbia) and country (Canada).

    To me, this pipedream looks very much like the 2002-2005 hay days of the California housing boom. I have personally experienced this and can probably write a book about it. I think the title of it would be called “Collusion”. It is merely how all bubbles are created. Collusion, on the part of the government by a way of low interest rates, a drive to increase homeownership at all costs in order to extract political dividends including becoming a subprime lender of last resort (e.g. CMHC in Canada’s case), mortgage and real estate broker and borrower fraud, unwarranted government subsidies to certain segments of the economy, i.e. the construction, real estate and financial intermediation sectors , to name a few.

    Location exclusivity being touted as miraculous reason for why prices are not where they should really be. Complete detachment from reality when it comes to economic and financial fundaments (e.g. price / rent ratios, price to earnings, population income potential, economic diversification etc). To add fuel to the fire which is destined to inevitably engulf all colluded parties involved, purported “chronic housing shortages”,” multi-decade demand outstripping supply” continuously trumpeted analyses and trends, “land-use restrictions” or “ lack of buildable land” justifications for why housing prices are so high, “net growth in foreign and inter-state (province) migration”, “the presence of a diversified economy “, and so the list went on, were all symptoms of the bubble mania which took hold in California in the early part of the decade.

    This was all good until there were no more greater fools left to bid up the inflated housing prices, and so the party abruptly stopped. People realized that they were not buying homes. In fact, they were renting them for the price of the mortgage.

    Those aforementioned fallacies, and many more others, are some of the principal reasons why the bubble burst in the States and why it will follow suit in Canada. British Columbia is no California, heck, Canada’s GDP is less than that of post-bubble California, with the country’s economy NOT as well diversified as one would expect, BUT heavily dependent on a few industries (e.g. oil and gas, energy, forestry and other derivative commodity industries, heavy machinery, construction etc.).

    Noteworthy is that Vancouver MSA’s per capita income is half of what per capita incomes are in the San Francisco Bay Area, certain portions of Los Angeles and San Diego areas, where prices have plummeted more than 50% from their peak.
    It’s only a matter of time until the bubble bursts.

    The deflation in the U.S. started when the Federal Reserve began increasing interest rates. This could, however, start sooner than that. One should pay a close attention on consumer psychology when it relates to perceived expectations in the future. Often, this is how contagions, financial panics, great depressions are started. The longer the imbalances persist in the greater economy when it comes to housing, the more painful and protracted the adjustment is going to be when it comes.

    The Canadian government can keep the last fool from wanting to dump his inflated housing mortgage on the market for as long it provides backstop guarantee. However, financial markets are going to severely punish the Canadian government shortly by dumping its dollar, lowering its perceived credit worthiness (thus increasing implicitly and explicitly borrowing costs in the economy). A scenario just like this is currently unfolding in the U.S. Anyone wanna buy BC, Ontario provincial government bond at 9%? You start printing enough money until the federal currency is eventually debased and has little incremental value left.

    After having met recently with “respectable mortgage brokers” who have been in the business for over 25+ years, I am now firmly convinced that this market is going to have a crash landing like one never experienced before.

    Pre-sales “pink paper” flipping (as what was called in the U.S.) where respective condo owners would trade condos like call options by purchasing condos without any intention of taking possession of the unit(s) and thus procuring further the housing bubble, funky appraisals based on comparable sales only with little to no historical economic fundamentals in place, liar loans (i.e. stated income (NIQ loans), stated assets) etc. are all hallmarks of the impeding and most definitely inevitable collapse of housing prices in Canada.

Another outsider view comes to us with this analysis of the US vs Canadian Housing Market by the Federal Reserve Bank of Cleveland.

(hattip to the blog Housing Analysis for finding this).


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  1. But haven't you seen the adds..? according to the government this is the "best place on earth"

  2. Another great posting!

    I thoroughly enjoy reading this blog and totally agree with the Whisperer’s view regarding the outlook for Canadian real estate. High prices, increased unemployment, and stimulus time running out…not to mention interest rates can only go up…are just several factors indicating price corrections are coming.

    Thanks for including the address to Jonathan Tonge’s blog in a previous post, which also provides some great info on the housing market.

    Keep up the excellent work!

  3. That reminds me of the road trip I took through California at the height of the bubble all the way down the coast from Oregon to just north of San Diego.

    It was in the midst of the bubble frenzy there and I remember thinking as we were driving in the hills about a half-hour drive out of San Fransisco but there's LOTS of land out here they could build on.

    Meanwhile yesterday I was watching TV for the first time in months - Citynews in Toronto. I was amazed at the number of ads for what are essentially subprime mortgage companies.