Next up in the real estate P/R playbook.

So where is real estate going?

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.

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The Financial Crisis - Explained

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.

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Getting out of Dodge...

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?

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The Art of the Deal

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.

Riiiigghhhht.

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Is there anything to debate?

Austerity vs Stimulus.

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."

Interesting times indeed.


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I don't think 'HAM' got the memo

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.

You can see the Ripley interview here.

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.

- Mish"

So am I. Let's see what happens.

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A butterfly flaps it's wings in China... what happens in Vancouver?

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.

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Nothing to see here... move on.

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.

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Today we celebrate our beloved Dominion...

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Austerity? Enter Helicopter Ben.

As I said yesterday, a battle is brewing between those who believe in stimulus and those who argue for a return to austerity.

In several articles for his New York Times column, Paul Krugman has argued that those who push for austerity in the face of recession are either doing so for political expediency or out of a “crazy” fealty to archaic economic views. Krugman believes the trillions of dollars worth of deficit spending unleashed by the United States and European governments in the last 24 months is inadequate. He believes our only remedy is to spend more – no matter how much debt results.

Reading straight from the Keynesian playbook, Krugman argues that cutting government spending now will simply send the economy back into recession. He asserts that by flooding the economy with money, i.e. “stimulus,” governments can encourage consumers to spend. Once the spending creates better conditions, so the argument goes, the economy will be better positioned to withstand the spending cuts, tax hikes, and higher interest rates necessary to address the staggering deficits left behind.

Curiously the person leading the banner for a return to austerity is the recently reformed former Fed Chairman Alan Greenspan. In a recent Wall Street Journal editorial, Greenspan argued that the best economic stimulus would be for the world’s leading debtors (the United States, UK, Japan, Italy, et al) to rein in their budget deficits. Greenspan explains that because lower deficits will restore confidence, diminish the threat of inflation, and allow savings to flow to private-sector investment rather than public-sector consumption, the short-term pain will lead to gains both in the mid and long-term. Rather than redistributing a shrinking pie, this approach allows the pie to grow. Greenspan’s view has been echoed loudly in the highest policy circles of Berlin, Ottawa, Moscow, Beijing, and Canberra.

But while Alan Greenspan may have had a profound conversion, current Fed Chairman Ben Bernanke has not.

Insiders suggest that Bernanke is waging an epochal battle behind the scenes for control of US monetary policy, struggling to overcome resistance from regional Fed hawks for further possible stimulus to prevent a deflationary spiral.

Fed watchers say Bernanke and his close allies, key members of the five-man Board, are quietly mulling a fresh burst of asset purchases, if necessary by pushing the Fed's balance sheet from $2.4 trillion (£1.6 trillion) to uncharted levels of $5 trillion.

The dispute has echoes of the early 1930s when the Chicago Fed stymied rescue efforts.

"We're heading towards a double-dip recession," said Chris Whalen, a former Fed official and now head of Institutional Risk Analystics. "The party is over from fiscal support. These hard-money men are fighting the last war: they don't recognise that money velocity has slowed and we are going into deflation. The only default option left is to crank up the printing presses again."

Mr Bernanke is so worried about the chemistry of the Fed's voting body – the Federal Open Market Committee (FOMC) – that he has persuaded vice-chairman Don Kohn to delay retirement until Janet Yellen has been confirmed by the Senate to take over his post. Mr Kohn has been a key architect of the Fed's emergency policies. He was due to step down this week after 40 years at the institution, depriving Mr Bernanke of a formidable ally in policy circles.

"The US recovery is in imminent danger of stalling," said Stephen Lewis, from Monument Securities. "Growth could be negative again as soon as the fourth quarter. There is no easy way out since fiscal stimulus has already been pushed as far as it can credibly go without endangering US credit-worthiness."

All these developments have prompted the Royal Bank of Scotland's credit chief Andrew Roberts to warn RBS clients to prepare for 'monster' money-printing by the Federal Reserve.

"We cannot stress enough how strongly we believe that a cliff-edge may be around the corner, for the global banking system (particularly in Europe) and for the global economy. Think the unthinkable," Roberts said in a note to investors.

Societe Generale's uber-bear Albert Edwards said the Fed and other central banks will be forced to print more money whatever they now say, given the "stinking fiscal mess" across the developed world. he said.

In light of all of this... is it any wonder people are concerned for their financial future?

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Crossroads

So the OMG-20 confab is over.

And the world leaders have had a chance to reflect on the situation in the Western world's economy.

For the last two years the economic policy of the West has been all about preventing deflation and curing recession by pouring vast amounts of public money into the system in a belief it would ignite a new era of prosperity.

It hasn't.

At best the economy of the West has merely muddled along.

Of course this isn't the way it was 'supposed' to play out. Usually 'stimulus' applied after a steep recession leads to a snappy recovery, like it did in 1983-84 after the Reagan tax cuts.

But as I have said on numerous occasions, we still do not fully appreciate the depth, breadth and scope of the 2008 Financial Crisis. A deep economic earthquake has occurred. And the full reprecussions are still not appreciated or understood.

Do you remember when the West started pouring money into this?

Under George W. Bush, Congress was told that a "timely, targeted and temporary" spending program of $150 billion was urgently needed to boost consumer "demand".

When the Democrats assumed control in Congress, they continued with the idea.

And the stimulus produced a slight increase in GDP growth in mid-2008, but it didn't stop the financial panic and second phase of recession.

That lead to the second round of "stimulus". $862 billion worth in February 2009. At the time a pair of White House economists famously promised that this spending would keep the unemployment rate below 8%.

It didn't.

The US jobless rate is still 9.7% and the GDP estimate for first quarter growth has been reduced again, this time to 2.7%.

And what do the Americans want to do now?

Why... more 'stimulus', of course.

The problem is the Western world's Keynesian political consensus is falling apart.

In Europe, the bond vigilantes have attacked the finances of Greece, Portugal and Spain, with Britain and Italy next in line.

Politicians are scrambling away fromt the 'stimulus' mindset to one focused on cutting spending and raise taxes.

Britain has introduced an austerity budget and Germany's Angela Merkel sees vindication for keeping her country's stimulus far more modest than other Western nations.

In America many Republicans and Democrats are rebelling against a third round of stimulus. The original White House package of jobless benefits and aid to the states had to be watered down several times, and the latest version failed again in the Senate late last week.

Some will argue that the world has now reached a Keynesian dead end.

But other's suggest the spending/debt party may have only just begun.

More on that tomorrow...

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46 US State Governments Facing Greek-Style Deficits

In California they are gridlocked over how to close a $19 billion budget gap and are weighing the termination of the main welfare program for 1.3 million poor families or borrowing more than $9 billion in the bond market.

Illinois, tied with California for the lowest credit rating of any state, is diverting a rising portion of tax revenue to service debt.

Finances in Arizona, New Jersey, New York and other states show few signs of improvement.

In total Forty-six states face budget shortfalls that add up to $112 billion for the fiscal year ending next June, according to the Center on Budget and Policy Priorities, a Washington research institution.

“States are going to have to cut back spending and raise taxes the same way Greece and Spain are,” says Dean Baker, co- director of the Center for Economic and Policy Research in Washington. “That runs counter to stimulating the economy and will put a big damper on the recovery in the latter half of this year.”

It appears that across the United States, all that stimulus money is drying up and States don’t have a choice anymore, their problems are going to require major surgery.

The risk is that California ends up like Greece, with no one trusting that it can get its financial house in order, says Steve Westly, California’s Democratic treasurer from 2003 to 2007. “It has to be a combination of cuts and revenue increases,” he says.

Will the federal government hang the US States out to dry or will they bail them out like they did Wall Street?

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A Tale...

Interesting question raised by SethM on a real estate chatboard: what's wrong with this picture?

On the shores of False Creek, located directly across from the downtown core of the City of Vancouver is the luxury real estate development of Millennium Water aka the Olympic Village. Sales of units are stalled at 36 with none having sold after the first 2 days (it's been on the market now for 5 weeks). Worse, 11 pre-sale purchasures are trying to let out of their legal obligation to proceed with their purchase.



Meanwhile, about 15km south is a proposed real estate development known as River Green. Located in the Vancouver suburb of Richmond, the development is across the Fraser River from the Vancouver Airport (with the accompanying views of the airport and the airport noise). The development is touted as the biggest ever single development in the City of Richmond and is the start of what the City hopes will be a reorientation of its downtown out to the Fraser River waterfront.

The first phase of that development, 458 luxury-oriented units in six buildings with completion expected some time in 2012, set condo sales records as 'HAM' money flowed in.



So what gives?

The consensus is that the River Green development pre-sales are driven by Chinese buyers whose intention is to sell when it's complete. In this development a 2 bedroom typically sold for $900,000 + HST. The Olympic Village is already complete... so no speculative potential there.

Thus we have a current, completed set of luxury condos on the highly desirable False Creek perimeter located directly across from downtown and Yaletown... and those condos go wanting for buyers.

But condos which won't be ready for 2 years in a highly speculative venture across from a busy international airport are snapped up instantly by speculators!

Naw... this doesn't scream 'housing bubble' at all.

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Where's the HAM?

Coordinated media campaigns are always something to behold.

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:



On June 21st the R/E propaganda machine gushed about records being set for sales from 'HAM':



So 'HAM' has created a buying frenzy, snapping up all the luxury properties in fierce bidding wars.

But like the old lady from the vintage Wendy's commercials I'm compelled to ask, "Where's the HAM?"

You've heard of one of the most luxurious and high profile properties in Vancouver, that collection of condos known as the Olympic Village extravaganza on False Creek, are now available for purchase.

On May 17th the newspapers trumpeted that in two days 36 units had been sold, "almost double the number anticipated."

But as VREAA noticed, five weeks have now passed and there are still only 36 units that have sold - and 11 of the pre-sale buyers are now trying to get out of their commitments to purchase.

Where's the HAM?

Last week I profiled the estate at 3639 Osler Street which had languished on the market for almost half a year before the sellers took a 34% haircut on their asking price.

No 'HAM' flavoured bidding war there.

And make no mistake... 'HAM' hasn't lead to a dearth of inventory. Click on this link and you will be taken to a website that lists all the houses for sale on the west side of the City of Vancouver. (Faithful readers from outside BC will enjoy this window into the absolute delusional world of Vancouver's housing bubble)

There are 805 detached houses listed.

Ranked for you in order of price, you will see the list headlines with an abode asking a cool $22 million.

There are 10 properties per page in this inventory layout. If you were to scroll through them looking for something under a mil... you won't find anything until page 72!

That's right, 711 detached houses currently up for sale on the west side of the city of Vancouver that have asking prices of more than $1 million dollars

(and yes... there are even more 'million-dollar-plus, homes for sale on the east side of Vancouver. Add to that even more million dollar condos and apartments).

711 detached homes.

There had better be one stupendously massive amount of 'HAM' pouring into Vancouver if it is going to support prices in this type of market.

Meanwhile the blog Vancouver Condo Info has also noted the rising real estate inventory. They provide a link to a Vancouver Asian newspaper who have been reporting this fact, presumably to the 'HAM'.

Along with the theme of rising inventory, VCI also took note yesterday of the very high number of price reductions occurring daily in the Vancouver Real Estate market.

Apparently daily price changes are ranging from 162 to 200 reductions. Even with the number of real estate listings in the Greater Vancouver area now nearing 19,000, VCI notes that we’re consistently seeing about 1% of total inventory drop their price every single day.

That means about 5% of all listings in Vancouver are reducing their asking price each week.

Somehow I'm just not buying into all the 'HAM' hype, sorry Cameron.

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Show me the money...

We keep hearing tales that Asian hot money is keeping real estate values high in Vancouver, but is it?

I'm sure the people that own this Dunbar house aren't buying into all that hype.

Courtesy of our friends over at VREAA, we bring you this 4 bedroom, 2 bathroom home at 4006 W. 38th Avenue.

From the listing description:

Beautiful, sunny and rare SW corner, 53 x 167 property (8851 sq ft) in the Southlands/Dunbar neighbourhood. Only 1 block from Pacific Spirit Park and a short stroll to Southlands/St Georges/Crofton schools. House is very pleasant - ideal for living-in or renting until ready to build, or... build your dream home now! The exceptional depth to this property allows room for a spacious house (w/ attached garage?), a pool? and still plenty of sunny yard, and/or a large garage (laneway house?). Endless possibilities, call to make this yours!

Endless possibilities? Perhaps. But there sure haven't been endless offers.

Gone are the bidding wars that saw properties snapped up in a couple of days. Apparently this property has been on the market for about 10 weeks.

On April 11th the asking price was $2,140,000,

On June 3rd the asking price was dropped to $1,980,000,

And on June 23rd it was dropped to $1,850,000.

So in 10 weeks we have seen the asking price drop about 15%.

Now let's be realistic... this isn't a 'luxury' property and maybe it isn't of interest to the so called 'Asian hot money'. But several months ago people were snapping up properties right, left and centre.

Not now. And prices are being slashed.

Is the Asian money angle R/E hype to keep sellers from slashing their asking prices and to protect the 'integrity of the market' or is it really flowing in and maintaining the bubblicious values?

More on this tomorrow.

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Back to Crisis Levels?

Germany's Deutsche Bank has a new and improved index of U.S. financial conditions and after analyzing current conditions they have concluded that US financial conditions have just collapsed back to the lows of the immediate post-Lehman crisis levels.

Meanwhile Bank of America Corp., the second- largest U.S. home lender, added 2,000 employees since April to work with borrowers having trouble paying their mortgages. The lender now has more than 18,000 workers in “default management,” a 60% increase since January 2009.

As housing goes, so goes stimulus. Expect to see the pressure to resume programs that support housing intensify as market trends deteriorate.

Meanwhile credit conditions or liquidity are once again tightening (spreads widening) as the economy is losing momentum from waning stimulus.

In other news, Freddie's most recent mortgage rates are out and they are the lowest in history. With the US Federal Reserve now looking at emergency interest rates staying low until 2013 or beyond, the only true recourse is even more monetary stimulus.

Albert Edwards, one of the most prominent uber-bears just got even more bearish: "Our view that this economic and market recovery will collapse like a pack of cards as soon as the steroid-like stimulus is reduced is gaining ground. Most forward-looking leading indicators now signal some sort of second-half slowdown. The only area of debate now seems to be in its magnitude. By the end of this year, I believe we will be back in recession."

Albert's vision is that we are entering a deflationary collapse, following by a reactionary episode in which the Fed ends up printing tens trillions in one last attempt to restimulate the economy, resulting in hyperinflation.

We certainly do live in intersting times.

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What comes next?

So as stats come out showing that the Real Estate market in Vancouver and Canada is stalling (albeit while contradictory reports flood the media that Asian money is buying up everthing in sight in the Lower Mainland of BC), it begs the question... how's the recovery going in the US?

Not so good, apparently (see chart above).

The US Commerce Department reported that new home sales in America plunged 33% to an all-time low in May following the expiration of the government’s homebuyer tax credit in April. If not for the massive downward revision to the April sales total, from an annual rate of 504,000 to 446,000, the monthly decline would have been more than 40%

Furthermore the May sales rate of 300,000 units is coming in well below the previous record low which was set in January of 2009 (339,000 units). In population-adjusted terms, the May new home sales total represents a decline of about 40% from the pre-2008 low of 400,000 seen in January of 1991.

In short... the situation in the United States is worse than ever.

And with Europe in financial dire straights, an important stage of the financial crisis of 2008 is about to play out.

Since the crisis began a debate has raged, a battle.

On one side are those who espouse Keynesian economics - combat the crisis by spending endlessly to avoid deflation and another depression.

On the other side are those that believe austerity is exactly what the system needs to purge the credit-crazed and real estate-mad phase we have been riding since 1980.

In Canada our Keynesian experiment involved massive bank bailouts, although listening to the malarky being spouted now, our country never threw a dime at the crisis.

We are told that the securitization phenomenon that let U.S. banks sell dubious mortgages to unsuspecting buyers never developed in Canada. Only about one-quarter of Canadian mortgages were securitized in 2007 (it was 60% in the U.S.), and they were solid, government-insured mortgages, not sliced, diced, leveraged subprime junk.

The 'solid' Canadian banking system saved the day, goes the platitude, and that's why in the U.S. (and elsewhere) near-zero interest rates haven't inflated housing prices. America's banking system is so sick that there just isn't much lending, while ours is healthy.

The fact is our government threw everything they could at the crisis in order to keep our real estate market juiced and our banks afloat.

• They changed mortgage rules from 10% down and a maximum 25 year amortization to zero down and first 35, then 40 year amortizations.
• Then came emergency interest rates.
• Next, a blatant blind eye has been turned to Canadian banks who are authorizing zero-down arrangements (with their 4% cash back offers) and allowing what amounts to liar loans.
• Then there is the way the government back funded the CMHC and ordered them to dramatically hike their high-risk loan exposure and approve Canadians for loans who normally never would have qualified.
• Then, at the height of the crisis, the Canadian government plowed tens of billions in funding to the banks by buying mortgages so room could be made for more to lend.

That's why credit continues to flow in this country. The Federal government is guaranteeing all that money.

We've thrown so much money at the problem that Kevin Page, the controversial Parliamentary Budget Officer came out and said that the Federal Government's orginally announced 2 year deficit (since expanded to 5 years) is now worse and that there's no way we’ll be balancing our books in 2014. Canada now has a deficit so large it is now structural and will probably be with us for an entire generation.

But because America and Europe have been spending like drunken sailors, record setting debt seems tame by comparision.

The question now is which way is the world going to turn?

Keep spending and ramping up sovereign debt or slashing debt.

A giant philosophical battle is about to intensify.

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Is there a Lehman Bros disaster looming in the Gulf?

I have been following an interesting discussion on another blog and it raises a fascinating point.

What are the ramifications of the BP crisis in the Gulf of Mexico from a financial perspective?

This is a line of thought that suggests the events in the Gulf could lead to an acceleration of the crisis brought about by the Lehman implosion.

Apparently a significant amount of liquidity in the global financial world is dependent on a solvent BP. BP extends credit – lots of it - through trading and finance.

So much, in fact, that the amounts, quality and duration of credit is on such a scale that a regular bank could only dream of. The financial muscle behind a company with 100+ years of proven oil and gas reserves dwarfs that with a bank (with few tangible assets) possesses.

What happens if BP goes under?

With proven reserves and wells in the ground, equity in fields all over the planet, nothing can match a major oil company in terms of credit quality and credit provision.

How many assets around the planet are dependent on credit and finance extended from BP? It is likely to dwarf any banking entity in multiples.

And at the heart of all that credit is a rat's nest of over-the-counter derivatives.

As a blogger posted, "Banks try and lean on major oil companies because they have exactly the kind of credit-worthiness that they themselves lack. In fact, major oil companies, conversely, spend large amounts of time both denying Banks credit and trying to get Bank risk off of their books in their trading operations. Oil companies have always mistrusted bank creditworthiness and have largely considered the banking industry a bad financial joke. Banks plead with oil companies to let them trade beyond one year in duration. Banks even used to do losing trades with oil companies simply to get them on their trading register... a foot in the door so that they could subsequently beg for an extension in credit size and duration. For the banks, all trading was based on what the early derivatives giant, Bankers Trust, named their trading system: RAROC – or, Risk Adjusted Return on Credit. Trading is a function of credit bequeathed, mixed with the risk of the (trading) position. As trading and credit are intertwined, we might do well to remember what might happen to global liquidity and markets if BP suffers what many believe to be its deserved fate of bankruptcy. The Intercontinental Exchange (ICE) has already been and will be further undermined by BP’s distress. They are one of the only 'hard asset' entities backing up this so-called exchange."

If BP does go bust (or even if it is just badly wounded) and the US entity is allowed to fail, the long-term OTC derivatives in the oil, refined products and natural gas markets that get nullified could be catastrophic.

These will kick-back into the banking system. BP is the primary player on the long-end of the energy curve. How exposed are Goldman sub J. Aron, Morgan Stanley and JPM? Probably hugely.

Credit has been cut to BP. Counter-parties will not accept their name beyond one year in duration. This is unheard of.

If BP falls, the very earth may shake as it hits the ground.

Mark Carney spoke this week on the perilous condition of the world financial markets.

And in the midsts of founding banks and faltering sovereign entities, we now have a major oil company on the verge of going under.

Another leg of the global economic “chair” is being viciously kicked out.

What will be the effects of a BP failure? Many speculate that it could easily be equal to that of a Lehman, if not more because the world is highly reliant on BPs provision of long-term credit to many core industries. Who makes good on all the outstanding paper that so many smaller oil, gas and electricity companies, airlines, shipping companies, local bus, railway and transportation networks that rely on BPs creditworthiness and performance for?

It doesn’t take a genius to figure out how this could all unwind. If BP has to be bailed-out, like a bank, the system will have to print even more unimaginable amounts of money.

The fact of the matter is that a BP crisis could unleash damage similar to the banking crisis. A BP failure through bankruptcy could make Lehman look small in comparison, and shake the world wide financial house of cards even more severely.

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Same distance, but world's apart

Pictured above, for faithful readers not from the Village on the Edge of the Rainforest, is a map of the Greater Vancouver area (click on the image to enlarge).

To the far left you can see the City of Vancouver proper. To the right, straddling the US border, are the bedroom communities of Abbotsford and Chillwack.

And while real estate is cheaper in the suburbs, Greater Vancouver is firmly locked in the absurd housing bubble that will wreak havoc on our Province when it pops.

Below these communities lies the 49th parallel - the US border. And on the American side, so close to the greatest bubble real estate market in North America, lies Watcom County in Washington State.

And how is real estate doing less than half the distance immediately south from Vancouver than if you were to travel east to Chilliwack?

It's a completely different world.

While real estate boomed in the lower mainland, the recently released 32nd edition of the Whatcom County Real Estate Research Report tells us that the bedroom community to Vancouver just over the border was well into the "bust" phase of the housing cycle at the end of 2009, with single-family sales down 50% from the peak and single-family permits down 75% from the peak.

And while longer term the county's housing market "will likely benefit from the locational advantages of the region, including an abundance of recreational amenities and its position as a lower-cost alternative to Vancouver and Seattle", right now it is sucking wind.

The number of Whatcom County homes sold last year (2,204) was the lowest annual total since 1995. The peak year was 2004, when 4,454 homes were sold. The median price last year was $259,900, the lowest since 2005. Last year, 186 homes sold for under $150,000, a 31% increase from 2008.

Meanwhile a few kilometres to the north lies the land of the million dollar single family homes.

Quite the contrast, isn't it?

Yet so many remain in denial about the perilous situation we are sitting in.

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Black Swan Alert...

We will file this one under the heading, 'Black Swan Alert'.

Arabic newspaper Al-Quds al-Arabi reports that 12 American warships, among which one aircraft carrier, as well as one Israeli corvette, and possibly a submarine, have crossed the Suez Canal on their way to the Red Sea.

Concurrently, thousands of Egyptian soldiers were deployed along the canal to protect the ships.

The passage disrupted traffic into the Suez canal for the "longest time in years." The Jerusalem Report confirms this passage.

Two other carriers are already deployed in the region, with the CVN-73 Washington in the western Pacific as of May 26, and the CVN-69 Eisenhower supporting operation Enduring Freedom as of May 22.

It isn't clear what the third carrier group may be yet but reports suggest it is almost certainly the CVN-75 Harry S. Truman (pictured above).

This follows reports by the Times newspaper of London that Israel has deployed three nuclear cruise missle armed submarines along the Iranian coastline.

HT: Zero Hedge.

These developments add credence to the rumours about munitions stockpiling on the British island of Diego Garcia in the Indian Ocean.

Back in March the Scottish newspaper, The Sunday Hearld, revealed that the US government signed a contract in January, 2010 to transport 10 ammunition containers to Deigo Garcia. According to a cargo manifest from the US navy, this included 387 “Blu” bombs used for blasting hardened or underground structures.

The suggestion was that these powerful US “bunker-buster” bombs were being shipped in preparation for a possible attack on Iran.

Experts speculated that the bombs were being put in place for an assault on Iran’s controversial nuclear facilities. There has long been speculation that the US military is preparing for such an attack, should diplomacy fail to persuade Iran not to make nuclear weapons.

Although Diego Garcia is part of the British Indian Ocean Territory, it is used by the US as a military base under an agreement made in 1971.

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Ostrich see, Ostrich do

Alan Greenspan is in the news again today repeating what should be the overriding concern of everyone in North America.

The former Federal Reserve Chairman has penned an op ed piece in the Wall Street Journal. In it Greenspan argues that the runaway Federal Deficit threatens to turn the US into the next Greece. He doesn't actually think that the US debt bears any credit risk, due to our ability to print at will, but that there is a substantial risk that borrowing costs will soar.

That last part is particularly important because as you all know, soaring interest rates are what would absolutely decimate the real estate market here on the Village on the Edge of the Rainforest.

1980 style interest rates on a $600,000 mortgage would push monthly payments up to over $11,000 per month. Not too hard to envision massive collapse under those circumstances.

When liquidating all those foreclosed properties, the only way banks could find buyers for these properties (assuming they could find buyers to make similar $3,000 per month mortgage payments) would be if the selling price of these homes came down to $165,0000.

Considering how many homes would be on the market, $100,000 would be a more realistic price point on these homes.

But a real estate collapse on that magnitude seems like science fiction to everyone today. But should it?

Look what is happening today. A simple 0.25% increase in the Bank of Canada rate, tighter mortgage rules and the looming HST have triggered a 10% drop in nationwide real estate sales and - in some cases - a 34% drop in the selling price of some high end homes.

With that in mind, is a drop of 80% in real estate values so outlandish if interest rates were to return to +20% levels?

Of course that's the rub. No one believes interest rates will ever go up significantly again.

And part of that rationalization is that the US Federal Reserve Chairman would never allow that to happen.

But here is the former chairman, Greenspan, noting that market participants are aware of America's towering deficit, yet yields continue their long march lower. Says Greenspan: "This is regrettable, because it is fostering a sense of complacency that can have dire consequences."

Greenspan knows that rates are set by the bond market - they can only be influenced by the Fed.

And the former head of the Federal Reserve is scared that while the bond market is currently driving rates down (creating the complanency he speaks of), this patter can - and will - change on a dime. When the bond market loses confidence in the US financial picture (which it inevitably will), interest rates will soar.

If he's worried, shouldn't we be concerned too?

But we're not.

And not only is Canadian complacency firmly entrenched, we're in outright denial that a problem even exists. And the perfect example of this denial was presented this week by Jay Bryan of the Montreal Gazette newspaper.

• "With yesterday's report that home resales are cooling and price increases shrinking, we can finally put behind us the horror of Canada's great imaginary housing bubble.
  
  This mythical creature terrorized credulous analysts and journalists in recent months, only a short while after some of these same unhappy people had been shaken by the equally nonexistent Canadian housing-market collapse.
  
  What really happened is that Canada suffered a short, steep drop in home prices as the recession hit late in 2008. This was immediately followed by a steep rebound as it became obvious that the recession's rock-bottom interest rates represented a rare chance to buy a home cheaply."

Bryan parrots the line that the politicians and banks have been bleating: that our real-estate rebound was possible because Canada's banking system (unlike America's) remained in good health. Cheap mortgage loans helped repair the modest damage to prices inflicted by the downturn. And that concern about the real estate market is nothing more than fearmongering by those "prone to panic attacks or the temptation to sensationalize."

Bryan argues that we can relax because our future is one in which skyrocketing prices will quickly cool as predictable market forces come into operation.

Joining in on the 'nothing to see here' mantra is Pascal Gauthier of the Toronto Dominion Bank. He says the housing bubble scenario promoted by those doomsayers makes little sense to experienced observers of the housing market.

Gauthier argues that there hasn'st been any sign of a bubble in Canadian real estate. What Canada has experienced was modest overvaluation with very little sign of speculation. The outlook, Gauthier believes, is for a modest fall in clearly overpriced markets, like Vancouver and Toronto, pulling down the national average price by a modest 7%.

Uh-huh. Sounds identical to the tale being told by American real estate defenders in late 2005 (hattip: Vancouver Condo Info).

I agree with Greenspan.

The current environment of low, low interest rates is fostering a sense of complacency that will have dire consequences.

Ignoring that fact is nothing more than burying your head in the sand. Especially considering the dramatic impact it will have on our housing market - and our lives.

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