Saturday, September 22, 2012

Are we heading for a Cataclysmic Correction? "That's bunk", says Sommerville

The war of words is heating up in Vancouver's housing bubble.

Yesterday it was CBC's profile of Vancouver and today CTV picked up on the story.

Former Member of Parliament, and noted critic of the Canadian housing bubble, Garth Turner was profiled on CTV with his warnings about our overblown Vancouver Real Estate.

CTV told viewers that Turner's message was simple: Metro Vancouver's real estate market is about to collapse.
"I hope people are listening. This message needs to be heard. Sales in August were pretty awful and they continued to deteriote through September. But you know what? This is going to be a year or two or three before we hit bottom. And I think the market could lose 30 or 40% of it's value."
To balance Turner's warnings, CTV turned to the resident market defenders we have come to know and love the last few years: Tsur Sommerville  - Associate Professor, Real Estate Foundation Professorship in Real Estate Finance; Director, UBC Centre for Urban Economics and Real Estate (As one VCI contributor said... can we possibly use the term 'real estate' any more often in a title?) and Helmut Pastrick, Chief Economist for Central One Credit Union.

CTV tells us these local economists are shrugging off suggestions that our real estate market is setting itself up for a collapse.

Our buddy Sommerville doesn't mince words as he tries to deflect the rising angst about the worsening market dynamics by attacking Turner directly.

"He's being saying this for like four or five years. So if you keep saying this then possibly one time you could be right and then you get to be a genius."
Oh? What are you saying Tsur? That the reality is that - at some point - the market is going to collapse 40% in value and that it's a no brainer Turner will be right if he keeps repeating this mantra?

It begs the question, if you believe the market will collapse by 40% at some point, when do you think that will occur?  But I digress.

As for suggestions that the market collapse will be triggered by rising household debt, Sommerville is even more blunt:
"That's bunk. In order to get dramatic change, dramatic drops in housing markets, there has to be... the market has to be pushed."
And rising, unsustainable household debt isn't the lever that will push the market?

Next we cut away to Helmut Pastrick to pick up the theme dismissing a possible collapse as a result of rising household debt:

"It could only be the result of a major economic recession, a downturn, or perhaps a financial crisis, a political crisis, typically outside of BC's borders."
Garth Turner counter's that our region is so overvalued, the outside forces Pastrick refers to aren't needed.
"The world doesn't need to change, the ground doesn't need to shift, interest rates don't need to pop up to have a cataclysmic correction."
CTV then quotes several 'average' people and captures them in quintessential denial that any such  collapse is possible. The whole dilemma is summarized as divergent opinions common to the spectre of real estate.

But the mere fact bubble busting news is now common place on the nightly media and that gloomy sales statistics are undeniable means it is clear the desperate fight for market perception is ramping up to new level

If you want to see the full CTV story, it could not be embedded. You can watch it here.


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  1. It's amazing how the media don't pick up on the fact that the vested interests always sing the same tune.

  2. If you take a close look at the "Average" people interviewed they are Babyboomers shopping mid-day at Whole Foods in Kits.

    This represents possibly the most insulated and delusional group of people in the city. If I bought a place in Kits in the 70s or even 80s I wouldn't fear a %40 market drop either. I still would be doubling my real estate investment inflation corrected for.

    Hell, if I did what a lot have done and subdivided my basement in to two grotty student suites, renting them out at $800/month each I would be laughing.

    A price drop is beyond the conceptual apparatus of most Vancouverites especially the older ones and those who have grown up here.

    Let them drink the "Best Place on Earth" Kool-Aid. If they want to financially ruin themselves because they buy in to a local cultural narrative, let them. It's no different that the cognitive dissonance in Calgary over the unsustainablity of the energy sector there.

    1. The health of the energy sector has a lot less to do with Calgary house prices than one would think.

      In 2008 house prices dropped about 20% in Calgary while the price of oil was above $100 the whole time. The crash would have continued but the government stepped in with their emergency housing stimulus in 2009. The same stimulus that turned around the Vancouver housing crash of 09. We are now seeing the continuation of that crash. This time there will be no emergency stimulus to turn it around. We are in for years of price declines in all Canadian cities.

    2. I'm not sure I claimed anything about the house prices correlating with the economics of the energy sector in Alberta (except maybe Fort Mac.)