Saturday, April 17, 2010

My God... the bubble's imploding!

Some excerpts for you from an article in the Financial Post by AJ Sull, president and chief investment officer at Pacifica Partners - Capital Management in Surrey, B.C.

Sull's points echo what has been written on this blog over the last year and a quarter.

  • In Canada, a significant amount of fiscal and monetary resources were committed to ensuring that the real estate market was stabilized. This helped to encourage Canadians to take on record amounts of debt and take advantage of the brief pull back in real estate prices. However, nobody seems to be asking the question: “What happens if interest rates go back to normal levels?”

    We are finding out that answer now as we have seen mortgage rates rise more than once within the last month alone. In addition, the federal government has begun to respond to the concerns of the banks to issue tighter guidelines for mortgage underwriting.

    Some observers are now coming to the conclusion that policy makers wasted the opportunity to guide the global economy away from the debt-consumption cycle. Amazingly, the US seems to be leading the world in bringing down debt and increasing savings because consumers there felt the impact of too much debt and not enough saving more than in most nations.

    As has been mentioned before, a surprising number of Canadians assume that they are not as reckless as Americans when it comes to piling on debt. The numbers seem to be showing otherwise. Part of the reason for this debt is that incomes in Canada have been stagnating relative to rising mortgage and credit card debt.

    In Vancouver, there seems to be a prevailing logic that “Vancouver is unique therefore prices are justified.”

    What makes a city unique is income, employment prospects and livability. At the elevated valuations we are seeing currently, it would appear that for prices to continue higher, Canadian real estate prices – led by Vancouver – will have to demonstrate the “Greater Fool Theory” – where sky high prices fueled by record amounts of debt can only continue if there is someone else willing to take on even more debt and pay even higher prices. This sounds like a recipe for trouble.

    As James Chanos, the renowned hedge fund manager who is shorting Chinese stocks - said in a recent television interview – it is not high prices that mark the existence of a bubble but rather high levels of debt punctuated with a lack of rational behavior. In his words, China is "on the treadmill to hell".

    Likewise, for Vancouver or other Canadian cities, it cannot be said that there is a real estate bubble just because prices have run up. That logic is linear and simplistic.That is too easy a hurdle to earn the bubble label. Rather, it is the herd mentality and the belief that somehow “this time is different.” Those four words are often said to be dangerous to one’s financial well being.

Sull is bang on. And the bubble is going to burst in spectacular fashion.

Rainforesters will be like Bowman starting at the monolith and only when it is too late will they gasp in realization: "My God, it was a bubble and it's imploding."

We can call it... 2010: The Real Estate Odyssey.


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1 comment:

  1. I live this blog!!! Always great posts! We are witnessing the beginning of the end of the bubble!