Saturday, December 29, 2012

Is a 70% collapse so hard to imagine?

As longtime followers of this blog know, our prognostication for the popping of the housing bubble in the Village on the Edge of the Rainforest is a decline on the order of 70%-85%.

Nothing brings more derisive emails than re-stating this prediction - even from those who already harbour a bearish outlook.

But is a 70% drop so outlandish?

Yesterday one of the properties we profiled was 2718 W. 24th Ave:

Built in 1988, this 5 bedroom, 3 bathroom house has changed hands three times since then.

In 1998 it sold for $455,000.  In 2004 it sold for $700,000.  In 2011 it was assessed at $1,864,000.

With no significant upgrades whatsoever, this property rose in 'value' from $700,000 in 2004 to $1,864,000 in 2011?  This is a perfect example of the bubble created by the CMHC polices outlined two days ago by the Globe and Mail Newspaper.

The Globe article outlines clearly, with comments from the former Bank of Canada Governor David Dodge, how CMHC policies inflated this housing bubble.

Every asset bubble in history - when it bursts - always over-corrects past the point when the bubble first started.

Below is real estate agent Larry Yatkowsky's average price chart from the start of December 2012 (click on image to enlarge):

Look at where prices were in 2004 (and some would argue that the bubble was already on it's way by then, having started several years before this).

Take a look at the uppermost graph - the stages that all asset bubbles go through.

If we to correct back to only 2004 prices, a mere 8 years ago, consider the impact on our housing market

(In 2004 the Vancouver average house price was around $520,000)

It means this house at 2718 W. 24th Ave would drop to $700,000... a 62.5% collapse in value from the 2011 assessment.

If the bubble correction overshoots 2004 prices, this house could easily shave 70% off of it's 2011 assessed value and drop to $560,000.

To eyes accustomed to housing bubble valuations, the mere idea that the 'worth' of this house could fall from $1,864,000 to $560,000 is just absurd.

But think about it.  This sort of drop only goes back to 2004.  When you look at the progression in panorama, it isn't hard to see how the bubble could burst in this fashion.

  • The policies that created the bubble are being reversed.  
  • The crack cocaine of easy credit that facilitated the dramatic rise is being removed.

Just remember one important thing. History shows that the unwinding of a bubble takes as long as the inflation of one.  It will take 8 years for values to fall like this... but fall they will.

And 70% will actually be a conservative number.

We are in for a painful ride.


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  1. "Is a 70% collapse so hard to imagine?"

    IMHO that's the rosy-est-est scenario.
    How about 90-95% once you factor in all the debt in the system, not only in the real estate?

  2. What many fail to see is that prices now are artificially inflated by low interest rates and (until recently) long amortizations. Prices have not even really started to correct yet; 10-15% is nothing, just wait until the crash really picks up steam. As an aside, I am so pissed off at the Feds for letting this whole thing get to this stage. What were they thinking? They have sunk an entire generation of Canadians into extreme debt and quite possibly this could bankrupt the country.

    1. For a "Conservative" government that supposedly believes in keeping government intervention in the economy to a minimum, they've sure stuck their fingers in many inappropriate places and done some very unwise things.

  3. What do you think about the fact that Garth Turner repeats over and over that there will be no crash in real estate? Although he is a very entertaining writer, I do not agree with him.

  4. There will be a whole s**tload of listings coming out in the spring market of 2013.
    Over-supply + Under-demand = Price Drop
    I do not have an economics degree, but it does not take a genius to figure this one out. You don't even need an increase of interest rates. Although tightening lending practices (aka sensible lending) will certainly be the final nail in the coffin. Prior to the 0 down 40 year amortization, it was unfathomable for me to even contemplate a $300,000 mortgage, with a $300,000 down payment. My spouse and I make above average income. In my head, I could not understand how a waiter at Earl's did not bat an eye getting a mortgage for $500,000 to buy a condo downtown, or a Costco worker approved for $900,000 re-fi mortgage. Irresponsible lending was the cause of this bubble, and when the money finally runs out we will see the deflating of this bubble.

  5. It is quite likely that prices will drop to 2004 levels in REAL terms. However, the NOMINAL (inflation adjusted) price drop won't be as much. After all there will be about 10 years of inflation.

    When looking at the drop from peak it is important to consider the affect of inflation on the fundamentals.

    1. Inflation in terms of the pre-2000 way of calculating inflation or inflation in the 2000-2012 method of calculating inflation or inflation as it will be defined in the upcoming 2013 re-jigging of the term (a move estimated to save the US government $130 Billion)'?

    2. True. Larry's graphs are deceiving as they show nominal price gains. An economist would always show graphs such as these in real dollars. The value of a dollar has has diminished 20% since 2002, so that's 20% off his 2012 peak nominal prices already.

      In other words, if you bought in 2002 you made 20% less in gains than the peak nominal price shown. A sudden drop of 30% in today's nominal price would equal close to a 50% drop from real gains.

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  7. First, let me state that I like this blog.

    But in this entry, the 70% correction predictions are silly and seem to forget the influence China now has on Vancouver’s market.

    As a business man that spends upwards of about 3 months a year in Shanghai, take it from me when I say that the wealth creation in that country is truly nothing short of awe inspiring.

    1.3 billion people are going from being poor/rural to middle class/urban, and with that literally thousands of new millionaires are created each year. The key here is to remember that this phenomenon is unique. There has never been such a large migration of people and wealth like this in human history.

    And these millionaires, these people I do business with every day, are smart enough to realize that they have to diversify in their investments…

    So what if recently China has slowed down from double digit to high single digit growth, it doesn’t change the fact that there is a massive wave of investors that look keenly towards Vancouver every single day.

    The 35 storey building next to me on West Cordova St. is 95% empty. (That’s not a typo.) And these international condo owners/investors don’t give a crap if our interest rates go up or whether mortgage amortization periods get shorter. These owners just need a safe place to park their wealth outside the reach of their scary government’s hands.

    I am not saying that there isn’t a correction in the making, I am just saying that if you’re waiting for 50, 60, or 70% you might grow old and die first.

    China will buying for many years to come. Anyone that bets against that doesn’t understand what’s happening across the Pacific.

    1. Excuse me, but I can't find any millionaires from China these days in Richmond. Can you tell me if they got lost? There must be a couple of them running around. Wait, if I set a trap and bait it with some dim sum....I might catch one and sell them a McMansion for 5X it's actual value! I'll be rich!

    2. Clearly Nigel isn't old enough to have experienced the 80s when Japan was generating fabulous wealth and was buying up companies and real estate worldwide.

    3. Nigel, I appreciate your opinion. I have read that there are a million millionaires in China, which it would be interesting on the definition on what a millionaire actually entails.

      Can you tell me what your take is on a property bubble in China? I've read several things where average workers own up to 5 condos on speculation. I've also read where cities have muni bonds that leveraged over 10x what they should be.

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  9. Some people get rich by sheer luck or because they inherit it, but the majority of people that get rich do so because they are at least somewhat shrewd and intelligent in business. And this observation applies even more so for the millionaires that are being created on a daily basis in China, for their markets are so much more ruthless and competitive than ours in the west.

    The reasons that you haven’t seen as much buying in Richmond lately is the same reason you didn’t see the smart money buying gold $1800/ounce or Apple stock at $700/share.

    Yes, all sorts of people from all types of socio-economic classes get burned when a bubble deflates, but in general the smartest tend to get burned the least. Chinese buying will return in full swing as soon as they feel that Australia’s and Vancouver/Toronto’s real-estate market has shaken off its weakest and American real-estate returns to it’s mean.

    Again, I am in agreement with Vancouver’s market dropping somewhere in and around 20%, but I am wondering if ‘Whisperer’ (and those readers who replied to my original comment with such passion as to be mistaken for angry), is allowing for ‘irrational exuberance’ to cloud his judgment when he speaks of a 70% correction.

    As for the Japanese comparison, it’s a false one. Japan never had the massive migration of millions going into middle class as we are seeing today with China.

    China’s internal consumption growth alone is set to eclipses the GDP growth (and amount except for USA) of any country for the next 10 years.

    And again, if you were a rich and capable Chinese businessman, wouldn’t you get your money into tangible assets outside of the reach of your temperamental government as fast as you can? And what would you put your money in? Europe? American bonds? American stocks? Or perhaps good old land?