There is one truism I have maintained these past two years.
In 2008 we experienced a deep financial earthquake whose repercussions we still do not fully understand or appreciate.
And those repercussions continue to reverberate.
There is still an astonishing amount of debt consolidation left to play itself out.
Further evidence of this are figures from Mark Zandi and Robert Shiller on the underwater equity statistics in the United States.
For those who think the recession is over and that we may be on the cusp of a recover, consider these observations from Zandi/Shiller that are making the rounds of the blogosphere:
19%, or 14.748 million of the 77.570 million US households, are in negative equity
30.6% of the 48.243 million of homeowners with first mortgages are in negative equity
21.8% of the 67.578 million in owner-occupied single family homes are in negative equity
4.133 million of the 14.748 million of underwater homeowners are underwater by 50%+, meaning the owe more than 50% more than their homes are worth
Of the 50%+ underwater category, the worst states are California (672K), Florida (423K), and Texas (344K)
Total Negative Equity in the US is currently estimated at $771.1 billion
California mortgages have $234 billion in negative equity, Florida mortgages have $79 billion in negative equity, Texas mortgages have $48 billion in negative equity
$2.4 trillion in total mortgage debt is impaired due to negative equity
Apparently there is growing interest in a long out-of-print book called 'Dying of Money: Lessons of the Great German and American Inflations' by Jens Parsson.
According to the article, Ebay has a copy available for a starting bid of $699. Amazon has a copy of the book for $234.
The Telegraph article focuses on Chapter 17 of the book which is entitled "Velocity". That chapter says that each big inflation - whether the early 1920s in Germany, or the Korean and Vietnam wars in the US - starts with a passive expansion of the quantity of money. This sits inert for a surprisingly long time. Asset prices may go up, but latent price inflation is disguised. The effect is much like lighter fuel on a camp fire before the match is struck.
The book vividly and thoroughly recounts the influence of inflation throughout history with special emphasis on the U.S. economy and the hyperinflationary events of the 1920s in the Weimar Republic, Germany.
In the Telegraph article, the writer (Ambrose Evans-Pritchard) notes that the book is suddenly in high demand amongst elite banking circles, particularly with QE2 immanently pending.
As July comes to a close, it is increasingly clear that the real estate market is changiing.
On Friday I wrote that MPC Intelligence Inc., a local market research firm, counted 6,659 condo units being put into the marketing phase between March 1 and July 1, 2010.
MPC noted that this amount of inventory approaches numbers thrown onto the market during the headiest days of pre-sales in 2007. Sales, however, are nowhere near 2007 levels.
The 6,659 condo units now in the marketing phase compares with just 1,937 that were on the market in 2009 and 5,066 in 2008.
Meanwhile the latest overall R/E stats are now out from realtor Rob Chipman.
Although it is just a mid month estimate, the current level of Vancouver 'months of inventory' (MOI) is on track to rise to 7.5 months. In the Fraser Valley it is 8.4 months.
The sales numbers being generated for July could leave the industry on par to record the lowest sales for the month of July in the past 10 years, even lower than during July 2008 (which was in the midst of the 2008 credit crash).
No wonder Bob Rennie is slashing the price for condos in the Fairmont Estates by 40%.
If the market continues to slow, things could get ugly.
If you know of any listings which are slashing their asking prices, post them in the comments section or email them and I'll pass them on.
"This is it! An affordable opportunity to own in beautiful downtown Vancouver in Yaletown at way less than original purchase price."
Peaks your interest doesn't it? Especially since the condo market appears to be softening up in the Village on the Edge of the Rainforest.
More from the Craigslist ad:
"Suite #1405 at the "Beasley" (named after former city planner, Larry Beasley)is the highly sought after "E" plan and originally sold for $547,900. We are offering it for sale at an incredible price of $459,000 (assignment of contract). The "E" plan is one of the very few plans in all of Vancouver that are a corner suite taking advantage of the natural light. It includes a stone granite kitchen island that opens up to the spacious living and dining room area, heated tile bathroom floors, Stainless Steel Kitchen Aid appliances and engineered hardwood floors. Not only does it have a den but also an extra flex space thereby smartly utilizing its spacious 678 square feet. The added amenities include a fully equipped fitness centre, meeting and library rooms and not to mention the unique 8th floor, 60 foot out door dog run area. The building is currently under construction from reputable local developer, Amacon who is responsible for building many beautiful properties within the city for the last 40 plus years such as the "Brava", the "501" and the "Melville" to name a few. Completion date is set is on target for a November 2011 completion... I was also one of the original sale people on this development. I look forward to hearing from you."
Wow!
So one of the original sales people is (apparently) cutting his losses and is willing to offer you one of the suites that he had secured for himself (presumably to flip), cutting the price from an initial $547,900 to $459,000: a loss for him of $88,000 (about 16%).
Or is it?
Keen local market watchers may recall an initiative launched by Amacon Development in 2009 called the 'pass it on' campaign. MAC Marketing Solutions trumpeted this campaign and rolled out the first version with the stalled Yaletown condo development 'The Beasley'.
In this campaign, Amacon offered reductions on the prices of their condos ranging, on average, from $100,000 - $250,000 off the initial purchase price. And these 'savings' were even extended to those who had already signed pre-sale agreements to purchase at the higher 'initial purchase price'.
It means no one ever actually bought a Beasley unit at the 'original purchase price'.
In all likelihood our Craiglist sales person paid, at best $447,900 for his Beasley condo. As a salesman associated with the project, he no doubt paid less than that.
Caveat Emptor, as they say, because these condos at the Beasley have already seen 'cuts' from their initial purchase price of at least 22%.
So it this a deal in a downturning market to offer the unit at $88,000 off the 'original purchase price' when the units actually sold at a minimum of $100,000 off that original price?
Yesterday we talked about the widespread real estate price-slashing in the Okanagan region of the British Columbia that started with the Bob Rennie marketed development known as Invue in Kelowna.
Recognizing that the market is turning for the worst, it appears Rennie is bringing those price cuts to downtown Vancouver.
The posh downtown Vancouver development known as the Fairmont Pacific Rim Estates and Hotel is an elite hotel/condo development located near the Canada Place Trade and Convention Centre.
The hotel occupies floors 1 - 31 with 400 rooms. Above that is a residential strata portion occupying floors 32 - 45 with 200 suites.
Vancouver Realtor Will Wertheim has sent out a tweet on Twitter advising that one of the suites in the Fairmont has dropped it's selling price from $5,250,000 to $3,088,000... a drop of 40% off of the original asking price.
Wertheim followed that tasty tidbit with another tweet advising that a second unit has been slashed from $2,750,000 to $1,598,000... a drop of almost 42% off the original asking price.
Both are Bob Rennie marketed properties.
News of these stunning reductions come just as the Vancouver Sun hearlds that a wave of presale condos are now flooding onto a slowing market.
MPC Intelligence Inc., a local market research firm, counted 6,659 condo units being put into the marketing phase between March 1 and July 1, 2010. MPC notes that this amount of inventory approaches numbers thrown onto the market during the headiest days of pre-sales in 2007, but at a time when real estate sales are nowhere near 2007 levels.
“It’s a big jump,” Jeff Hancock, senior manager at MPC said in an interview.
Hancock compared the 6,659 units now in the marketing phase with just 1,937 in 2009 and 5,066 in 2008.
Just like he did in Kelowna with Invue, Rennie can see what's coming and he's scrambling to stay ahead of the curve.
And that means starting off by slashing real estate prices by 40%.
Curiously... the 'hot asian money' we keep hearing about doesn't appear to be snapping up all these luxury properties at 40% off. Maybe it's because they aren't pre-sale contracts that can be 'secured' for a miniscule downpayment (like the sellout at River Green in Richmond)?
Those presales are the ultimate R/E speculator vehicle.
And that's the difference between 'HAM' actually supporting our market and 'HAM' leveraging a small wager (we call it a downpayment) on a presale contract that's unenforceable in Chinese courts.
In the real market, Bob Rennie is taking on the competition by slashing prices by 40%.
Back on July 10th we talked about the Kelowna development of Invue hiring Vancouver Condo King Bob Rennie. Desperate to move product in a stagnating market, Invue was dramatically hacking prices by 40% to dump inventory and get out of Dodge.
Was Invue having an irrational reaction to market conditions?
Apparently not. This week we learn that the shine is definitely off Okanagan real estate and there is no doubt a buyer's market has returned to the sun-drenched region. Not only are many developers delaying projects, but more and more are dramatically dropping prices on current units in a frantic effort to promote sales.
Back in June it was more than evident trouble was brewing.
At that time Okanagan Mainline Real Estate Board president Brenda Moshansky said in an interview that, "we're definitely slower on the recovery [than Vancouver or Victoria]. It's been slow and steady coming back."
Moshansky said that listings were beginning to flood the market. "We're seeing more listings coming on, but there's definitely now a heavy enough inventory to create a buyer's market. And Alberta, with their natural resource sector being slower, their discretionary spending for recreational spending has been a lot more cautious."
Invue was the first clear sign the market was collapsing when Rennie was brought in and prices were trimmed 40%. And now the bleeding is clearly spreading.
As reported yesterday on CKWX AM 1130, developers all over the Okanagan are following Invue's lead and are cutting prices.
Advertised prices on many new developments are down between 20-30%, six-figure savings in some cases. And according to developer Matthew Hay even deeper discounts can easily be obtained.
There is "a surplus of product on the market" and the evolution of "a whole buyer demographic that is nervous, cautious, sitting on their wallets, waiting to see how things shake out," said Hay
Clearly the age of the bidding wars are over and the irrational buying has ended.
As I said on July 10th, one wonders how long before these shifting sands of 'simple economics' hit the Vancouver real estate market? If a 40% reduction is just the first stage of the downturn in the Okanagan... how bad could this get?
Curiously it triggered over 20 emails about how wrong I was on this issue.
To summarize, I have long viewed the China economic dragon as a paper tiger. China has, on a per capita basis, pumped as much - if not more - stimulus into their economy as America.
And that massive stimulus - source of the infamous 'HAM' we keep hearing about - has created a huge real estate bubble in China.
In recent months the Chinese central government has taken significant steps to cool the market.
And now the Chinese Central Bank has come out with warnings of a 'relatively large' property collapse later this year.
Specifically China Finance, a publication of China's central bank,has warned that there's 'very large pressure' for Chinese property prices to fall in the second half of this year.
Government measures to curb property speculation have had "initial" results and further effects will be evident in the second half, wrote Zhou Jiang, of the housing ministry's research center. The article is in the July 16 edition of the magazine.
Declines in cities where prices previously rose quickly will be "relatively large," Zhou wrote without naming cities.
Imagine if our Central Bank came out with such clear warnings about the bubble they created?
We'll watch with keen interest to see what fallout, if any, is felt in the Village on the Edge of the Rainforest.
I have talked about gold on this blog in the past.
In North America there are those who eschew gold/silver as an investment and claim that "gold's only use today is as an inflation hedge as record debt depresses currency values, until fiscal order is restored."
They are right. The problem though is that people are starting to realize that it is going to be a long, difficult time until 'fiscal order' is restored.
As you peruse the blogosphere, articles can be divided into one of two sides of a philosophical fence. On one side the argument that we are slipping into deflation. The other, inflation.
I guess you could say it appears I sit on the fence. A deflation/inflation symbiotic relationship, if you will.
The problem is to look ahead and assess how things will play out. After that you make you decisions on how best to prepare for what is coming.
On July 8th I made a post about the austerity/stimulus debate. To me, there is no debate... there will be a second round of massive stimulus.
And because of that I would suggest that you will see the Euro roar back towards a high and the US Dollar will sink to new lows because. I think it's unavoidable because the financial condition of the USA dwarfs the problems of Europe.
Inflation and hyperinflation are always the product of a loss of confidence in currency. All hyperinflation in modern history has occurred for one reason, and one reason only. That is loss of confidence in currency.
Loss of confidence in a currency can be brought about by many reasons, but there is one constant factor. When hyperinflation has occurred in modern history EVERY economy involved was decimated as and when it occurred.
Everyone talks about the world wide economy falling into deflation. The fear is that the US Federal Reserve is out of ammunition to fight deflation.
Oh?
I disagree.
The US Federal Reserve can (and will) do Quantitative Easing to infinity. Nothing can restrict them on this. And the European Central Bank will not be far behind in following their lead.
You can argue all you want about deflation, but the next response by the US Federal Reserve is not that hard to predict (Bernanke has already written about it - his famous speech on the matter is where the nickname 'Helicopter Ben' came from).
With the next round of currency printing (QE2), you will in all probability see another $2 trillion in currency printed.
'Loss of confidence' is what is driving the interest in gold.
And that 'loss of confidence' is starting to manifest itself in the United States itself.
In mid-Michigan they are starting to take matters into their own hands. As ConnectMidMichigan reports, "New types of money are popping up across Mid-Michigan and supporters say, it's not counterfeit, but rather a competing currency. Right now, you can buy a meal or visit a chiropractor without using actual U.S. legal tender."
Minted by private mints, people are to buy and sell goods with pure silver coins. In one simple act they have completely bypassed the destabilizing influence of the domestic currency printers known as the US Federal Reserve.
Dave Gillie, owner of Gillies Coney Island Restaurant in Genesee Township talks about it in the article.
"Do people have to accept dollars or money? No, they don't," Gillie said. "They can accept anything they want or they can refuse to accept anything."
The U.S. Treasury Department says the Coinage Act of 1965 says "private businesses are free to develop their own policies on whether or not to accept cash, unless there is a state law which says otherwise."
And in Michigan, they are starting to use things other than US dollars.
"I sell three or four (of the non-US government silver coins) every single day and then I get one or two back a week," said Gillie.
Gillie also accepts silver, gold, copper and other precious metals to pay for food.
The is a trend starting. Gold is starting to be used as money. For food... and to load up your gas tank.
So why is there interest in these competing currencies?
I would suggest that events are clearly pointing to a point where QE2 is unavoidable and with it will come a crisis of confidence in the US dollar.
It means inflation and a spike in the value of gold/silver.
To me it seems you want to position yourself to take advantage of these two, apparently unavoidable, trends.
More evidence that reality is somewhat divergent from the R/E 'spin'.
Faithful readers will recall that last month the R/E propaganda machine was attempting to calm jitters about a significant real estate turnaround.
You can't hide declining sales numbers, but panicking sellers were 'soothed' with news that 'Hot Asian Money' (HAM) was maintaining property values, particularly on the west side of the City of Vancouver.
Headlining this message on June 12th was our buddy Cameron Muir from the BC Real Estate Association who specifically talked about 'HAM' maintaining west side market values:Perhaps this reassurance would calm nervous buyers and keep them dashing into the market, a move which would support market prices?
Well, as we already know, the Real Estate Board of Greater Vancouver (REBGV) statistics for the month of June 2010 came out and the numbers didn't reflect Muir's appraisal of the situation..
On the west side of Vancouver, where all the supposed 'HAM' money was supporting real estate values, the benchmark price for detached homes dropped a significant $91,000 from May to June.
And now... in the middle of July... it appears the downward slide continues.
As noted on VREAA the above pictured house at 3540 West 40th Avenue provides a snapshot of what could be an accelerating collapse.
Promoted as an outstanding Dunbar character home in immaculate, move-in condition, this 3,359 square foot 4 bedroom, 2 bathroom home sits on a 6,700 square foot lot.
It was touted as having been maintained in pristine condition with a high basement ceiling and large unfinished area with great suite potential if needed. The home was originally listed for sale at $1.549,000 on June 7th, 2010.
Hot Asian Money didn't exactly rush in to trigger a bidding war.
Instead what we witnessed was something more akin to a seller desperate to move the property.
On June 12th, 2010 the asking price was reduced to $1.449,000 - a reduction of $100,000 in the blink of an eye 5 days after the property was originally listed!
And with no one jumping in on that, the seller obviously received an offer from a buyer sensing the desperation.
On July 6th, 2010 the home sold for $1,340,000, yet another $109,000 shaved off the latest asking price.
That's a total drop of $209,000 (or 13.5%) off the original asking price... a far cry from several months ago when bidding wars were triggering sales in a day after listing at well over asking pricse.
More significant in all of this are the background details of this sale.
This home had been held by the owner for over 40 years. At first blush you would conclude that the sale is no big deal because the owner could obviously come down significantly from their asking price and still make a huge profit.
Which is true. And that is very telling.
As we have talked about before, a chilling dynamic will be hitting real estate in Canada over the next 15 years.
The first wave of Boomers are hitting retirement age this year. Statistics show that over 70% of these Boomers do not have adequate funds set aside for retirement. Their whole retirement 'plan' lies in selling their home, downsizing, and using the left over money for their retirement years.
In this cases, holding out for 10 or 15 months to get that optimal 'asking price' is probably not an option... especially if fears of a declining market start to grip the general public.
I suspect you will start to see more of this; long-time west side owners listing their homes and then quickly and dramatically slashing their asking price in order to realize the sale.
The chilling fact is that anyone who bought in this area in March/April (at the top of the market) is suddenly $210,000 underwater from their purchase price. And if the benchmark price continues to plunge, other Boomers will fall over themselves as they drop their asking prices in a desperate attempt to close that sale. Remember, even at 50% off current asking prices, any real estate sale represents a stunning profit over what these owners paid 40 years ago. And as momentum builds, latter Boomers will be frantic to salvage what they can from their retirement 'plan'.
Fear.
For Boomers who have all their retirement plans wrapped up in the value of their house, it will become 'the' most significant motivating factor.
This particular home owner shaved almost 14% off their asking price when the home was only on the market for 1 month. Imagine what a wave of Boomers will do if their homes languish on the market for almost a year?
We will watch the next 12 months with keen interest.
Remember back in February when Finance Minister Jim Flaherty brought in new, 'tougher' mortgage standards?
The prevailing impression was that it would stop reckless borrowing by Canadians who were putting themselves, and the country, at risk with highly leveraged borrowing.
It is interesting to note that Flaherty said, “the measures will not affect the ability of a Canadian family to buy a house. It will affect those who are speculating. What we’re getting at is the speculation in multiple condominium units in particular which we see in Vancouver, Montreal, Toronto and in some other places in Canada.”
It's an important distinction. Because the average joe seems to think that you can't simply buy a home with no money anymore... a move that strengthens our nation's housing market.
The fact is that nothing is further from the truth.
You can still buy a home with nothing down in this country, as this mortgage broker in Abbotsford clearly tells you on their website.
$0 Down Mortgages on Owner Occupied Properties: Are you tired of paying someone else’s mortgage? You don’t want to deal with landlords any more however, you have no money to buy a place of your own. We have the solution for you in the form of a $0 down mortgage. This means that almost anyone can own their own home. We have lenders who will finance 95% of the purchase price and give you 5% cash back for your down payment so you can own your own home. Also, you have the option to have your 5% down payment gifted from family or borrowed in the form of a loan.
As the current market 'slowdown' catches steam, look for R/E media propoganda go into overdrive as it targets and entices those sitting on the sidelines to get into the market under this arrangement.
On Monday I wrote, "I suspect we will see the R/E machine gear up in a replay of 2009 and attempt to fortify 'consumer confidence'... look for the real estate P/R machine to ramp the propaganda by drawing on those pages from the media manipulation playbook that focus on 'consumer confidence'.
I envision a flood of articles on creative first time buyers finding ways to 'take the plunge' and commit to their future by finding creative ways to don the massive mortgage chains that are so crucial to greasing the real estate wheels of upward property mobility."
And lo and behold, four days later, we have this article from the Vancouver Sun.
Ostensibly it is a business section article about the dramatic drop off in sales for the month of June.
But that 'news' is buried around a typical R/E propaganda puff piece. In this case we hear all about a single mother who is ecstatic because she bought a home at a time when the market has only just begun it's downward spiral (or what the R/E playbook currently calls a "buyers market"). And the hook is that she got $9,000 off the asking price for a home way out in the distant Vancouver suburb of Maple Ridge.
The purchase is spun as a 'shrewd' by a home-hunter who is 'in control' in this buyer’s market.
No comment is made about an appalling this situation wherein a single mother winds up assumming a $400,000 mortgage after a minimum 5% downpayment at a time when the Governor of the Bank of Canada has spent the last few months warning Canadians about the dangers of assuming massive debt on the eve of significant interest rate hikes.
You can understand the Real Estate Associations attempting to 'market' in this fashion.
But for the media to pimp out R/E industry objectives by candy-coating signifcant business news that would otherwise adversely impact herd mentality home sales is nothing short of a breach of ethical journalism.
It's a sad commentary on our media, on our democracy.
The shifting sands of real estate continue to blow in Vancouver.
The big news today is the B.C. Real Estate Association coming out with the June sales figures.
Almost all British Columbia real estate markets experienced declines in sales in June, but Metro Vancouver experienced the biggest decline.
Sales in BC were down 22.5%t from the same month in 2009.
Active listings in inventory, in the meantime, climbed almost 21% to hit 59,232 units in June, which equaled a 9.3-month supply based on the pace of sales, Cameron Muir, the association's chief economist said in a press release.
“Market conditions have shifted from balanced conditions at the start of the year to a buyer's market this summer,” Muir said.
Hmmm... wasn't this the same Cameron Muir who said last month that 'Hot Asian Money' was going to maintain market values?
The key influences, he added, are the same ones that have helped to slow demand since they took hole in April: tougher qualifying rules for some mortgages, particularly for first-time buyers and those seeking secondary suites.
Events going on the in the United States are crucial to our little hamlet in the Village on the Edge of the Rainforest.
As we discussed in 2009, pretending that we are somehow immune is pure folly. Our provincial forest industry is decimated without steady US sales, ditto our mining industry. Our other big industry, tourism, also draws substantially on American travellers. Even our giant underground industry (BC Bud) focuses on Yankee customers.
So as Pierre Trudeau once said; when the elephant sneezes, Canada catches cold.
And right now not only is the elephant sneezing... he's hacking, wheezing and generally doing very poorly.
So poorly that one wonders how the debt rating agencies of Moody's, Standard & Poor’s, and Fitch can continue to give America (and other western governments) AAA debt ratings.
Those debt rating agenciees are supposed to assess the credit risk of corporations, financial instruments, and sovereign nations around the world. But their dismal performance of doing that lay at the core of the 2008 Financial Crisis... after having given AAA ratings to the mortgage backed securities that brought the world to it's financial knees.
But today another ratings agency is making headlines, and they have a slightly different view of things.
China’s Dagong Global Credit Rating Company has burst onto the scene and has stripped America, Britain, Germany and France of their AAA ratings. In the process they are accusing their Anglo-Saxon competitors of ideological bias in favour of the West.
Unlike Moody's, Fitch and Standard/Poor's, Dagong gives much greater weight to “wealth creating capacity” and foreign reserves. As a result the US falls to AA, while Britain and France slither down to AA-. Belgium, Spain, Italy are ranked at A- along with Malaysia.
Dagong gives ratings of AA+ to Germany, the Netherlands and Canada... and it ranks China on a similar level.
Debate will rage about the independence of any agency from China, but complaints about the bias of Moody's, Fitch and Poor have been prominent and accusations about not downgrading western countries, particularly the United States have been rife.
This all comes on the heels of a report from President Barack Obama's national debt commission.
Republican Alan Simpson and Democrat Erskine Bowles painted an extremely gloomy picture to a meeting of the National Governors Association
The committee said the United States has to consider curtailing popular tax breaks, such as the home mortgage deduction, and instituting a financial trigger mechanism for gaining Medicare coverage.
They said America's total federal debt next year is expected to exceed $14 trillion — about $47,000 for every U.S. resident.
"This debt is like a cancer," Bowles said. "It is truly going to destroy the country from within."
Simpson said the entirety of the nation's current discretionary spending is consumed by the Medicare, Medicaid and Social Security programs.
"The rest of the federal government, including fighting two wars, homeland security, education, art, culture, you name it, veterans, the whole rest of the discretionary budget, is being financed by China and other countries," said Simpson.
China alone currently holds $920 billion in U.S. IOUs.
Bowles said if the U.S. makes no changes it will be spending $2 trillion by 2020 just for interest on the national debt.
"Just think about that: All that money, going somewhere else, to create jobs and opportunity somewhere else," he said.
Making matter worse, the committee has identified a truism which makes this story of paramount importance to each and every one of us. The amount of debt the United States is carrying means, “we can’t grow our way out of this,” said Erskine Bowles. “We could have decades of double-digit growth and not grow our way out of this enormous debt problem."
The commission pulls no punches and says what everyone already knows: "the nation faces a fiscal catastrophe."
One wonders if Dagong was a bit too generous with it's AA rating for America?
We've seen the benchmark price of houses on the west side of Vancouver drop $91,000 in one month (from $1.679 mil to 1.588 mil).
We've seen downtown realtors call on prospective seller's to recognize, in the current market, they must cut their asking price if they want their property to sell.
We've seen Vancouver property flippers dismiss the current malaise as a temporary fluctuation of the market and put on a brave face.
And we've seen Okanagan property developers accept the reality of a real estate paradigm shift and heavily discount inventory by 40%.
I suspect we will see the R/E machine gear up in a replay of 2009 and attempt to fortify 'consumer confidence'. We have already started to see signs.
Andrew Pyle, of ScotiaMcLeod, came out on July 6th on CBC news and commented on sales drops and possible price drops saying, “this is probably more of a ‘one-off’ rather than something we have to be concerned about for the rest of the year into next year.”
But having watched Bob Rennie initiate a 40% slash-and-burn condo sale in Kelowna, I suspect those seriously underwater pre-sale Invue owners are not comforted nor reassured by Pyle's optimism.
Nor will they find comfort in Royal LePage President Phil Soper's statement that the declines in sales and prices "should not be interpreted as a severe correction but rather a natural reaction to the market having peaked quite early this year.”
As Rennie said, the reality is pricing has to be repositioned. The economic collapse eroded consumer confidence and as stimulus and emergency interest rates give way to tighter mortgage standards and higher rates... that elusive 'consumer confidence' vanishes.
So look for the real estate P/R machine to ramp the propaganda by drawing on those pages from the media manipulation playbook that focus on 'consumer confidence'. I envision a flood of articles on creative first time buyers finding ways to 'take the plunge' and commit to their future by finding creative ways to don the massive mortgage chains so crucial to greasing the real estate wheels of upward property mobility.
Consumer confidence and astute first time buyers. I can almost see the pre-written media package stories of a young couple (one of whom will be a realtor) taking the plunge now - stories that magically appear with a local twist in every major paper across the country.
Came across this simply fascinating David Harvey animation of the causes of the ongoing financial crisis. You have to wonder how long it took to create this. The clip is eleven minutes of fast drawing video, but how many actual hours (or days) did it take? It's a pleasure to watch and is extremely funny in parts, the “excessive capital” argument and the resulting conclusion being quite thought provoking as well.
Kelowna is a city on Okanagan Lake in the Okanagan Valley of British Columbia and ranks as the 22nd largest metropolitan area in Canada.
It is a popular summer destination for both Vancouverites and those Albertans from Calgary and Edmonton. Like Vancouver, it has it's share of multi-million dollar homes - and a real estate boom just as bubblicious as the Village on the Edge of the Rainforest.
In the heart of Kelowna, on Springfield Road, is a new 14 storey luxury hirise called Invue. With walls of windows, pointed balconies, a desirable proximity to Orchard Park mall and varying sizes of units; it has all the elements which the developer figured would enable the building to be marketed as a desirable address in a highly desirable BC city. It other words... an easy sell.
But the development has become the sure thing that isn't.
And making this particular development even more significant is the recent hiring of a marketer to promote the building... none other than the infamous Vancouver condo king, Bob Rennie.
Originally the target market for this sale was to be Albertans and Vancouverites looking for upscale vacation, retirement and investment homes.
But as we have noted in recent posts, the real estate market has swung dramatically. And sensing what is coming on the horizon, Rennie has been brought in to dramatically shift focus.
The new target strategy? Locals first. Then those Albertans and Vancouverites who are returning, post-recession to the Okanagan, looking to find bargain-priced second and investment homes.
And the key here is 'bargain-priced'.
Recognising the shifting sands, Rennie has sold the developers on a marketing strategy that has, at its core, slashed prices. And we mean SLASHED prices... by a stunning 40%. (Recall that Rennie is also marketing the Olympic Village in Vancouver, a campaign that saw 36 units sell in the first two days but has stalled with no further sales after five weeks).
Unit 707 at Invue - a 1,011-sq.-ft., two-bedroom condo on the seventh floor with nice views - is now for sale for $298,000, down from $440,000.
Unit 1406 - a 1,231-sq.-ft., two-bedroom on the 14th floor with stunning views - has been reduced from $625,000 to $419,000.
And the penthouse, a 2,400-sq.-ft., three-bedroom with loft beauty, is now $1.2 million, down from $1.8 million.
Recently Rennie mingled poolside with realtors and media on Invue's rooftop terrace in a promotional shindig. And Rennie let everyone know that Invue is serious about selling out at dramatically reduced prices.
"The reality is even if you have an architectural icon and an A-inventory building like Invue, pricing has to be repositioned," said Rennie. "This is not 2007, and Albertans are not buying over the phone just because it's a condo in Kelowna. The economic collapse eroded consumer confidence and that means people are only going to buy if the price is right and the home makes sense by being the proper size and having the proper layout, being close to shopping and transportation."
Rennie's job is to sell the 80 of the unsold units in the 96-unit Invue. So far, in a recent 18-day period, he has sold 14 units at the reduced prices (16 sold as pre-sales). And while Rennie has almost doubled the number of units sold in the project with the 'slashed prices' approach, 66 remain.
"To be truthful, we were in a bind," said Invue developer Adrian Block of The Rykon Group of their dismal performance in only selling 16 units at 'full' price. "The economy has changed and we have unsold condos and it costs money just hold onto inventory."
Block said in many ways the drastic action taken at Invue is simple economics.
"The marketplace ultimately sets the price," he said.
"We made the hard decision to meet the marketplace on price rather than wait for the marketplace to come up to our original pricing."
What about the Invue buyers who paid premium prices during pre-sales back in 2007 and are moving in as this clearance sale goes on?
"It's hard on them and it's hard on us," admitted Block. "Those buyers who paid full price bought during a different economy."
Think about that for a second. The pre-sale buyers have had to go commit to their new mortgages just recently and then... just days after committing and moving in... they are advised that the spiffy new units they just acquired had depreciated a stunning 40% - overnight! - with no guarentee that they won't drop even further.
The marketplace is shifting, the economy has already shifted, and in Kelowna developers are cutting their losses and 'gettin the hell out of Dodge.'
One wonders how long before these shifting sands of 'simple economics' hit Vancouver real estate.
If a 40% reduction is just the first stage... how bad could this get?
This story has been on numerous Vancouver blogs but it worth taking note of.
How frantic is Vancouver's housing bubble?
As we reach a possible nexus point, CBC gives us a profile of the fast money that is the market in the Village on the Edge of the Rainforest.
Harpreet Bajwa is a local real estate speculator taking advantage of the bubblicious conditions in the market.
Bajwa has three houses on the go which he plans to flip for a quick profit. In the CBC story above, Bajwa is shown with this house in South Vancouver which he bought for approximately for $580,000 eleven weeks ago.
Bajwa did some basic renovations and this past weekend he listed it on the market $729,000, a cool $149,000 more than he paid for it.
Bajwa is hoping for a bidding war and a sale higher than his listing price.
And why not.
Juiced up by cheap money, record low interest rates and CMHC insurance, real estate has been a speculator's bonanza.
The CBC story even profiles a property Bajwa successfully flipped in a similar fashion.
Six months ago he flipped this place:
In a reflection of just how crazy our market has been, Bajwa tells us that in December 2009, 50 families came through the one and only open house his realtor conducted for this property.
The end result was five multiple offers... an honest to goodness bidding war.
Emboldened by his success, Bajwa now has three houses on the go to flip in similar fashion. But the market has shifted.
As we has outlined this week, sales in the Vancouver market plummeted last month 30% compared to a year ago.
Is Bajwa worried? For the moment he remains optimistic.
"The up and downs do come in life, but, generally, it will go up.”
We will watch for future developments to see how this plays out.
Meanwhile our Finance Minister and others insist we aren't in a bubble... it's a balanced market.
The debate on financial TV and in the blogosphere continues.
Paul Krugman warns that without massive new stimulus funds we will slip into another Great Depression (the third for those keeping count, after the Panic of 1873 and the Crash of 1929).
The pundit from Parliament, Garth Turner, says "not a chance" and suggests a prolonged, significant recession and deflationary times lie ahead - but no Great Recession.
Back on October 1, I spoke about a period of deflationary times and noted "If deflation takes hold, the stock market will suffer a massive correction, tons more businesses will fail and unemployment will skyrocket beyond what are already substantial highs."
As the stimulus winds down those exact fears are now being expressed. It's a fascinating period of time to be alive. But will events play out that way?
For years economists have had a great philosophical debate about the 1929 Great Depression. Federal Reserve Chairman Ben Bernanke, a self-proclaimed student of the era, has written that it was the Federal Reserve's fault that the 1929 Great Depression took hold because of the way the Fed allowed the money supply to shrink. In fact, Bernanke even apologized on the part of the Fed for “causing the Great Depression.” Bernanke wrote a famous piece explaining that the Fed has a magic instrument, the ability to print money, and that if it were ever necessary he would drop this Fed-created money to the American people from helicopters. With his magic power, concluded Bernanke, there was no way the US could slide into another Great Depression.
Now... two years into the 2008 Financial Crisis, Bernanke has left interest rates at zero, printed over two trillion 'dollars' and backed billions of dollars in stimulus plans. What does he have to show for it? Unemployment remains high, housing stays in the dumps and the national debt has sky-rocketed beyond all reckoning.
So will Bernanke now shift direction? His entire raison d'etre is wrapped in stimulus approach.
While the Austerity camp maintains that what needs to happen is a period of recesssion/depression to consolodate 65 years of unbridled debt expansion... and with US debt levels now pushing above 90% of GDP... is there any question about what Bernanke will do next?
Does anyone think the US Administration will give up and instruct Bernanke to allow the forces of deflation and correction to express themselves?
Does anyone genuinely think Washington will accept a long, drawn-out recession or another Great Depression as the solution to their problems?
Bernanke will do what he has always said must be done. He will do what he has staked his professional reputation on... he will try to print America out of the recession.
And as the individual states, 46 of which are in dire financial shape, slip into insolvency and need to be bailed out... as the burden of social security and medicare encompass and suffocate budgets... people will say Europe is financial kindergarten compared to what's coming for the North American economy.
Austerity? From Bernanke and the American government?
I don't see how anyone could really be unclear on what steps will be taken next.
Which brings us to historian Niall Ferguson. In an interview with Bloomberg TV's Erik Shatzker, Ferguson discusses the bond vigilantes,
"Bond vigilantes are a bit like the people short selling investment banks a couple of years ago. You start with Bear Stearns and Lehman Brothers, you don't get to Goldman Sachs until quite late in the game. In a way the sovereign debtors of the western world are pretty much in that position today. And we are working down the list, starting with Greece, moving on to Spain and Portugal, the UK dodged the bullet by implementing some preemptive measures. Sooner or later the bond vigilantes will get to the US, I don't think it will be this year, but in the absence of any political will to address this problem, this is simply an inevitability."
As to why it is inevitable, Ferguson observes the case of the UK which was the only country in history to manage to grow its way out of a massive debt load:
"Britain after 1815 had two big advantages, it had the only the industrial revolution at that point that was going on in the word and had the world's biggest empire. I don't see anyone in that happy position today."
The outlook:
"Is it going to be inflation or is it going to be default. Right now there is no sign of inflation. We have monetary contraction at an alarming rate, and zero inflation in terms of core CPI, so the option of inflating this debt away doesn't seem to be there right now. What you are left with is therefore default. And I think it is a fair bet that US will default at least on the unfunded liabilities of Social Security and Medicare at some point in the foreseeable future. What the Greeks discovered you are fine until you are not fine with the bond market and if you have a non-credible fiscal strategy of borrowing a $1 tillion a year for the rest of time, never ever again running a balanced budget, at some point the markets are going to get spooked, and I think that point is nearer than Paul Krugman believes. Nothing would spook the markets more than for Paul Krugman's advice to be accepted by the Obama administration. That might well be the trigger."
As previously noted, on June 12th we heard about how 'Hot Asian Money' (HAM) was maintaining property value on the west side of the City of Vancouver. Headlining the message was our buddy Cameron Muir from the BC Real Estate Association:
So here's Cameron - in the MIDDLE of the month of June - telling us 'HAM' is going to maintain property values on the west side of the city of Vancouver.
Well... lo and behold the latest Real Estate Board of Greater Vancouver (REBGV) statistics for the month of June 2010 are now out and things in June don't quite reflect Muir's appraisal of the situation..
Seems the 'Ham" didn't get the memo from Cameron.
The REBGV in June reported total sales of 2,972 which is the 2nd lowest sales total for June in the last 8 years. Only June, 2008 (when the world financial markets were imploding into the greatest credit crisis and subsequent recession since the Great Depression) had lower sales.
In addition to significant drop in sales, there has been a substantial rise in unsold inventory (17,564); it'ss double what it was 6 months ago (Jan/10).
These conditions combined to drive the overall REBGV benchmark price for all housing in all areas down by just over $10,000 from May to June.
But $10,000 is the average of all areas in Greater Vancouver combined.
On the west side of Vancouver, where all the supposed 'HAM' money was supporting real estate values, the benchmark price for detached homes dropped a significant $91,000 from May to June.
And up in toney West Vancouver, home of all the luxury properties the 'HAM' is supposed to be snapping up, the one month drop in apartment prices has been a significant 11.5% off the previous month's benchmark price.
As the blog Vancouver Condo Info notes with the clever graphic above, you could have gotten a free luxury car by waiting a month to buy.
We will see if the downward trend continues.
Brian Ripley, CEO, Oakes Ripley & Associates, certainly thinks it will. He was on BNN yesterday and not only does he think the downward trend will continue but he believes Vancouver is in for a signficant collapse.
Meanwhile, stateside, noted American blogger Mike Shedlock (Mish's Global Economic Trend Analysis) has also taken note of these recent statistics and wrote:
"This pattern is quite similar to how things cascaded in the US once the top was in.
Housing Collapse Cascade Pattern
Volume drops precipitously
Prices soften a bit
Inventory levels rise slowly
High-end home prices remain relatively steady for a brief while longer
The real estate industry tries to convince everyone it's "business as usual" and homes are affordable because rates are low
Bubble denial kicks in with media articles everywhere touting the "fundamentals"
Stubborn sellers hold out for last year's prices as volume continues to shrink
Inventory levels reach new highs
Builders start offering huge incentives to clear inventory
Some sellers finally realize (too late) what is happening
Price declines hit the high-end
Increasingly desperate sellers get creative with incentives, offering new cars, below market interest rates, trips, etc
Gimmicks do not work
Price declines escalate sharply at all price levels
The Central Bank issues statements that housing is fundamentally sound
Prices collapse, inventory skyrockets, and builders holding inventory go bankrupt
Some of those may happen simultaneously or in a different order, but the whole mess starts with a huge plunge in volume.
I am now confident the peak in Canadian housing insanity is finally in.
According to the mailbag, some people believe I don't think there is any Asian money in Vancouver real estate.
Au contraire mon frere!
'Hot Asian Money' does exist. My point is that it isn't the massive band aid that will sufficiently sustain the world's most bubbly real estate market as it faces severe pressures from increased listings and decreasing sales.
That's why the most recent set of statistics from the Real Estate Board of Greater Vancouver show that the 'months of inventory' available has now risen to just about 6, prices have fallen for 2 months straight and a weak market looks set to fall even further.
But make no mistake... there is a lot of 'HAM' here notwithstanding.
In fact 'HAM' may represent an even greater achilles heel to Vancouver R/E than interest rates.
As faithful readers know, I have long viewed the China economic dragon as a paper tiger. China has, on a per capita basis, pumped as much - if not more - stimulus into their economy as America.
And that massive stimulus... source of the infamous 'HAM' we keep hearing about - has created a huge real estate bubble in China.
In recent months the Chinese central government has taken significant steps to cool the market. This has prompted Kenneth Rogoff, the ex-IMF economist, to observe the the Chinese property market is beginning a collapse that will hit the banking system hard.
The Harvard University economics professor told Bloomberg Television today that property transactions have dropped and prices are stagnating in the wake of those central government moves.
"You're starting to see that collapse in property and it's going to hit the banking system," said Rogoff.
Even Xu Shaoshi, China's minister of land and resources, said this past weekend that he expected prices to start falling within a few months.
If accurate it would validate the likes of Jim Chanos and all those who have long been warning about the inevitable Chinese bubble pop. And the impact of such a pop on Vancouver would be profound.
In 2008, when North American stock markets collapsed, Americans who were pressed for cash on margin calls and debt issues at home make the logical choice... they liquidated foreign property holdings for cash first.
In Vancouver, high end properties - particularly those in West Vancouver - saw signficant declines in value as foreign owners sold for whatever the market would give them immediately for their properties.
That's what happens in these types of circumstances.
If Rogoff is correct, the effect in Vancouver will be significant.
The turning of the real estate market in Vancouver continues unabated. Listings are up, sales are down... even the CREA came out in the middle of last month (June 16th) with a press release confirming this fact from May's sales.
And just like in 2008, the R/E machine cranked up the P/R offerings as to why this should not concern you.
Last month the angle was all about 'Hot Asian Money' (HAM). The spin was 'HAM' was pouring into town and this would support property values - ergo no need to drop your asking price.
Stories appeared everywhere promoting this angle, but it appears reality is having it's effect.
If you are a faithful reader of this blog, you have seen postings about the ever-upbeat downtown realtor, Ian Watt. Watt posts regular youtube blurbs constantly pumping the market. During last year's downtimes, Watt regularly chided buyers for following negative press about the market.
So should we expect a similar tact this time around?
Perhaps recognizing early on a similar pattern as the start of last year's downturn, Watt has posted this latest blurb telling potential sellers that they have to recognize the turning market and bring down their asking prices:
You know the market has to be turning significantly when you see such a blurb by Watt. Which means we should be seeing the next move by the R/E P/R cabel in response to this turn of events.
And right on que comes this article in Saturday's Vancouver Sun.
Authored by real estate bull (and developer) James Shouw, we are chided to stop focusing on declining sales numbers and increasing listings as red herrings that distract you from the real issue (although somehow this point is never relevant when sales are booming, listings are few and prices are climbing).
Shouw's position?
"Real estate numbers are transitory, but value is forever, the only 'news' that matters: the metropolitan population increases 50,000 annually."
Schouw basically throws realtors under the bus dismissing them because they focus on those headlines that focus on a year-over-year decline. While that concerns realtors who are primarly focused on volume, this news shouldn't concern real estate owners.
"As a developer, I'm primarily concerned about value. As a real estate broker, I'd likely be more concerned with volume. Value and volume can fluctuate in parallel, or in opposition, depending on underlying market dynamics."
It's a variation of the 'buy now or be priced out forever' mantra. Land is running out, people continue to move here, so don't worry... values will fluctuate but real estate will always go up.
Look for this theme to be repeated all summer long to counter a falling market.
“The Federal Reserve is now a government within a government. It is totally out of control. Congress doesn't control it. It's funded by the banks and we either have constitutional government or we don't."
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