Friday, June 8, 2012

Ain't Gonna Happen??? Hmm... perhaps it should be - How Low will it Go?

Our housing bubble is now mainstream news.

Sales of existing homes in Vancouver sank 15.5% from a year ago May, with the sales for the month coming in the lowest for any May since 2001.

At the same time the active inventory backlog surged 16.8% and new listings were up 14.4% from a year ago.

As listings soar and sales tank, the man on the street in now openly discussing 'The Bubble'.

But talk is now moving past whether or not there is a bubble. Gluskin Sheff chief economist David Rosenberg is in the Financial Post proclaiming that Vancouver’s housing bubble has burst."

It all comes on the heels of May data which shows Vancouver's single family houses are now down 12% with no signs the slide is going to stop anytime soon.

Garth Turner takes a look at the data and proclaims:
"The event’s just begun. This was a lesson bitterly learned by those early vultures who swept down on US real estate in early 2006, smelling blood, only to end up catching a falling knife. After doubling in value over the last eight years, with the economy marking time, salaries trailing inflation and unaffordability off the chart this market is not going to clock out at fifteen per cent. If prices can dip 12% in a few months, they can decline 40% over the next 18 months."
True... but for many 40% is just too hard to fathom.

Consider this musing from Vancouver realtor Larry Yatkowsky.  He broaches the concept of a 32% drop in prices and consider's it a level most of us would not imagine:
Let’s start at the highest average price ever reached in Vancouver for a detached home – a mere $1,235,244. Now let’s also assume this market is on the skids sliding down the drain faster than we think to bottom out at something most of us would not imagine – a market that drops so much it hits May 2009′s Average Price of $831,171. With a price drop of $404,073... that's a 32% drop from the all time high.
Of course some of us can imagine it.  We don't think it's all that hard, actually.  But the disbelief in daily discourse is more than palpable.

Even in our little corner of the blogosphere it draws comments of incredulity.

On Tuesday we made a post about Random Thoughts.

Among the commentary that followed, one faithful reader (DG) opined:
"I would agree with prices dropping but your prediction is beyond impossible. It is basic economics and as you can see from the various RE blogs that there are people sitting on the sidelines waiting for the drop to enter into the market. There are many. These people will support the price and keep them from dropping beyond 20 to 30% as rates continue to stay low."
So a 30% drop is impossible?

My prediction, as you know all too well, is for a drop of 70-85% when all is said and done.

But I can't help but be fascinated by the steadfast belief by so many (... I say this because I encounter it in day-to-day discussions as well) that prices simply won't drop beyond 30%.

Even Yatkowsky finds a drop of 32% unimaginable for most.

Thus our post.

Ain't Gonna Happen vs. How low will it go?

So the first major signpost on this journey is the 30% mark. We will watch and focus on it.

Unimaginable? Unattainable?

With apologies to Rod Serling...
"This highway leads to the shadowy tip of reality: you're on a through route to the land of the different, the bizarre, the unexplainable... Go as far as you like on this road. Its limits are only those of mind itself.  That's the signpost up ahead - Next stop... The Bubble Bursting Zone."


Click 'comments' below to contribute to this post.
Please read disclaimer at bottom of blog.


  1. You are so right Whisperer... for so many this will be a trip to a Twilight Zone.

  2. When do we get to predict how low silver will go?

    I am DG and I did not say they could not go below 30%. I stated as long as rates stay low 30% is the floor. If rates go up you could see a little more damage.

    1. If interest rates are the key determinant, please explain US mortgage rates and the corresponding price drops in US cities like Pheonix, Miami, and LA.

  3. Oh by the way I like the Twilight Zone header. Nice. Vancouver Real Estate is the twilight zone...funny.

  4. After 5 years - so by 2017, we'll be back to 2002 price levels.

  5. DG, the thing about a falling market is, once people believe that the fall has started, they no longer see a 20-30% drop as a buying opportunity. Instead, people start to wonder where the bottom is, and get scared of the downside risk.

    Buying after a 30% drop begins to sound like buying nortel in 2001 at $60/share and falling.

  6. A 70-85% drop prediction, while music to my ears, strikes me as overly bearish given the going rental rates. Care to elaborate on your reasoning, village_whisperer?

  7. Affordability with respect to wages will drive normalization of housing costs. With this in mind a 70% drop is completely plausible.

  8. " you can see from the various RE blogs that there are people sitting on the sidelines waiting for the drop to enter into the market. ...These people will support the price and keep them from dropping beyond 20 to 30% as rates continue to stay low."

    For I am, 30% off is necessary to have me look. And savings to help be buy. Who's to say I'll have a job though? If the fallout is too great, then even lower prices will come. Personally I'm not hoping for that. I just want a reasonable price. But I think we will get the fallout because of the choices made in 2009 to reinflate the market.

  9. I was just perusing Miami RE on and saw a couple places 70%+ there highs. Definatley not heard of. These places are selling for $200,000 now. They look remarkably like the Vancouver specials (maybe a bit nicer).

    I am looking in a good neighbourhood, close to the beach. In the same area there are houses listed for $10 - $20M, and a couple blocks away for $150 - $500K. Not a ghetto area, looks decent.

    Many (all?) of the same reasons that we hear Vancouver RE cannot drop this far were also stated in Miami.

  10. 70%+ off, I mean to say.

  11. One thing people need to remember is a price of RE or an equity is what anyone is willing to pay at a given time. While I think 70% average is very unlikely, there might be properties that flirt with this, while most take a hit of 30 to 40%. They will eventually recover to saner levels.

    I think what is different now then when the US, UK, Spain, etc. bubbles burst is there was a flood of money trying to stabilize things. As the US market just dead cat bounced, there is still some more pain there, and more in the UK and Spain. There isn't much money left for Europe. I don't see a flood of money to rescue Canada (and Australia). The world economy is about to git hit with round two which will be much worse as China and India are struggling to sustain growth. Additionally, China, which has enormous investments all over the world, is in a bubble of unknown proportions. There has been talk about municiple bonds being taken out at 10x collateral realistic valuation.

    I don't think most Canadians can fathom a RE drop, too many people are on the coolaid. Once things drop nobody is wanting to catch the proverbial falling knife. Most people who can afford to be in are IN. Credit is going to tighten on anyone who was on the edge of going IN. People who are completely over-leveraged are going to have to sell. I think the reality is there are very very few single property buyers (vs investors/speculators/landlords) left to keep the bottom under this thing.

    The very very sad part is this is going to destroy lives. Unlike the US, where you can pretty easily walk away from your mortgage, Canadian banks will take people to the cleaners. How is having no money in a crashing economy a good thing?

  12. Most people who think that a 30% drop is unthinkable seem to forget we had a drop bigger than that in the early 1980s.

    And that is just recent history. There were 70%+ drops in real estate around 1918 and 1930 right here in Vancouver.

    Those who don't learn from history ......

    1. Yes, Rob. You are right about that. The Vancouver Book by Chuck Davis covers some of the history of the financial disaster in Vancouver during the 1930's.

      Some of the worst damage (the most precipitous price drops)were amongst the tony set of bankers and brokers and industrialists who owned homes in Shaugnessy.

      When things got so bad that taxes were going unpaid the city began seizing the upscale homes and turning them into boarding houses to put a roof over the heads of the thousands of people who were flowing into the city in search of work and in need of services.

      The key point though is that the largest drops in prices were reserved for thhe most expensive properties. That is a very typical outcome in a housing bust.

      The cities wealthy class were completely wiped out in many cases. There exposure to debt was simply too high and their leverage to the stock market of the day was their undoing.

      There is little doubt in my mind that our country will face many difficulties in the coming few years. While it may not be on the same bitter level as the Great Depression it will still hurt those who are deeply in debt. Many will fail financially. Many more will bankrupt.

      Unfortunately, some of the most leveraged property in town is in the West Side, West Vancouver and Richmond areas. These will likely see very significant drops in value as the global delevering process takes hold.

      Keep in mind, we are not immune in Canada.

      As both the Prime Minister and US President have pointed out in the last few days...we live in an interconnected globalized world. Nobody can be fully immune to what is taking place elsewhere anymore. What happens in China and Greece and Germany and the US matters to Canada now. Perhaps more now than at any other major turning point in history. Our fate is intertwined with theirs.

      So we are all in this together.


    2. Precisely Farmer.

      Its also important to note that municipalities at the time were so dependent on land sales for revenue growth that when RE crashed entire Districts went bankrupt due to lack of funding.

      Contrary to what Bulls say, Vancouver has a direct and clear history of having major housing crashes. This time will be no different.

  13. It is false to say the US is differnt due to recourse/non-recourse loans. I hate seeing this myth over and over again. The only non-recourse states are listed below:
    •Alaska (AK)
    •Arizona (AZ)
    •California (CA)
    •Connecticut (CT)
    •Idaho (ID)
    •Minnesota (MN)
    •North Carolina (NC)
    •North Dakota (ND)
    •Oregon (OR)
    •Texas (TX)
    •Utah (UT)
    •Washington State (WA)

    You'll notice that Nevada and Florida, two states where home prices dropped the most, are not in this list. Having recourse laws didn't seem to stop the drop there, why do we expect it to have an impact in Canada?

  14. Even with the non-recourse states, it is more nuanced. Here is my understanding on some details -

    * California - non-recourse is only for purchase money (ie: original loan obtained to buy the home is non-recourse). If someone got a loan in 2005 at say 5.75% and refinanced as rates drop to lower their payment - Ie: got a new loan for example at 4.5% and paid off the old it is no longer purchase money. Refinancing in the US as rates drop is a very common move. Almost everyone does it to drop the monthly cost. The person is then subject to recourse (being sued) if they sell and their banked doesn't want to agree on a write-down.

    * Minnesota (and many other states) - The lender can choose either between foreclosing in lieu of deficiency judgement or go to court to get a deficiency judgement. The bank will make a decision. Presumably the poorer someone is with no assets, the more likely a bank to just write it off. If a person has assets saved up, and/or makes a lot the bank may prefer to preserve the right to sue and go the longer deficiency judgement route through court. Imagine yourself after working 10-20 yrs, if you have had any success, you'll have some money that the lender will rightly want.

    The "myth" circulated of Americans just able to walk away is vastly overstated. I was just involved in the proposed purchase of a home that was a short sale in Washington State, and the deal fell apart because the sellers bank decided to sue them for the money rather than take the loss. It seems a similar situation to Minnesota rules.


  15. I don't think the myth is overstated. I know several people who essentially just handed over their keys. Some people have to declare bankruptcy and life goes on. It's possible the banks are getting more aggressive now as the losses keep piling up for them. The only place you get in trouble is if you have a HELOC, you cannot walk away from those. I've seen some stats for how many households here have HELOCs and it is pretty staggering, basically just using the equity as a checking account.

  16. 70-80 percent is not possible in a 'normal' correction where RE prices are the only factor; the norm under those circumstances is 40-50% at most. However I agree that 70-80 percent, not just in BC but across most of Canada will be seen due to extenuating circumstances, namely, the much Greater Global Financial Crisis that is now developing across the world. When the full consequences of this crisis are felt, RE prices will be the last thing of concern to almost everyone. The RE bubble is a mere symptom of the disease of unpayable debt accumulated through artificially suppressed interest rates. This unprecedented level of debt is in the process of wiping out the Middle Class across the world. Things have a tendency to revert to mean and the mean for the world has been Rulers and Serfs, no Middle Class. As the world once again reverts to mean, the Middle Class will be wiped out not just financially but literally. At this late stage of the game I would be much more concerned with survival than with vultching a cheap Yaletown condo. These are unprecedented times, read all of hsitory, and you will not find a time such as this with a Global Economy so tightly interconnected that all must sink together, and when this Titanic goes down, so too will a couple billion lives conservatively. Apocalypse is staring us in the face, and under these conditions a 70-80 or even a 90% drop in price in Vancouver is not only possible, it is highly probable.

    Those million$ crack shacks may well sell once again for 90K. I see prices receding all the way back to the late 70's, early 80's, that is if there are any buyers at all. In a falling market, there will be far too many sellers for the decline to stop at 30%. I have seen at least two busts in Canada over the past 30 years, and the norm was 50%. What has happened in Canada since 2000, and especially since 2009 is so far removed from the norm that it is just not possible that the slide will halt at 50%, it is going much lower, and it won't take 10 years either! It will be much faster than the US slide once people realize that the Coyote has gone over the cliff and is falling down, not flying high as they thought, and the ground is now in clear sight. Spppllllllllllatttttttttt!!!!

    1. "This unprecedented level of debt is in the process of wiping out the Middle Class across the world. Things have a tendency to revert to mean and the mean for the world has been Rulers and Serfs, no Middle Class. As the world once again reverts to mean, the Middle Class will be wiped out not just financially but literally"

      Oh my God, Deshpal. Now you are really freaking me out. You are right of course. We are living in an incredible period of time but it is a true anomaly compared to prior periods in history.

      A mean reversion from a historical perspective would certainly suggest the end of the middle class, of unions, of social equity and even of most of the institutions that we take for granted such as fair government and an honest judiciary.

      The kind of society we live in now has only been possible because of the adoption of a fiat based money system. Without fiat there can be no pension system, no welfare, no vast network of social services and therefore no need for all of the people working to support those causes.

      A reversion to the mean tells us we will go back on a gold standard and a very bitter way of life for millions upon millions of people.

      Of course that is impossible. There are simply too many people now and insufficient resources (such as farmland) for that to work anymore. Only catastrophe awaits if this economic rubics cube cannot be solved for the benefit of all.


    2. I think what we are all victims of constant indoctrination through Media and Education. Through constant reinforcement, patently false claims such as a 'Fiat' money system is necessary for individual freedom and prosperity are accepted as truth. The fact is that the US already had one of the most vibrant Middle Classes ever in history before the Federal Reserve was formed in 1913. Even with the gold standard, industries grew and individuals prospered, above all, people were free to determine what was best for them, this was not the job for the State. Welfare was also a community responsibility not that of the Government. The model worked and would work again with honest money but sadly it is now too late. If individuals had the right of Self-determination, and the State existed only to protect those rights not to confer those rights, we would not need a ‘Fiat’ money system.
      People who serve a depopulation agenda promote the myth that the world is running out of everything, especially oil. Whether Oil is even a fossil fuel is not allowed to be question; God has created a magnificent Eco-System on the planet that self-regenerates and renews, and this would include oil. So the problem is not resources, the problem is the distribution of resources. Localized self-sufficient economies that have been the historic norm would be far more sustainable than Big Agro-businesses that produce in one part of the world and sell in another, all for their own unconscionable profits. I live in the GTA and I ride throughout Ontario, and all I see is fertile agricultural land, more fresh water than we can consume in a 1000 generations, and greenery like it was the Garden of Eden and yet we are told that we are running out of water and energy and food and everything else. Having lived in BC, I know that BC is even more resource richer than Ontario, and this is true of all of the Americas, fertile, rich soil, fresh water filled lands that could support billions more if we had equitable distribution of resources. Despite their large populations, India and China are also resource rich (except for oil). India has been agriculturally self-sufficient till now even with 1.2 billion people, and on a land mass that is much smaller than the US. I could go on but the point is that we need to question all the information coming out of Media sources, and that includes the Propaganda Indoctrination factories that we call schools. We have all been Matrixed into accepting the lying worldviews of the lying power elites who have been corrupted by power and now seek absolute power as they become absolutely corrupted.

  17. People believe real estate always goes up. In addition, many people today have zero aversion to debt. Add to this the lowest interest rates in history and a government that enticed people into houses through easy qualifying and increasing the loan portfolio of CMHC.
    Now that the shoe shine boys are buying real estate, the wheels are coming off the crazy train, just as the worldwide greater depression
    rears it's ugly head. A 70% drop would take that $1.2M average down to $360,000, which even seems a little rich.

    1. Substitute "Pizza delivery guys" for "Shoe shine boys" and then I will agree. And you are right, $360,000. is a ridiculous number given what is coming. Even the 1% are now being priced out of Vancouvers market.

      How crazy is that?!!!