Golden Opportunities and the Psychological Stages of a Bubble

One of the questions I get all the time is: are you a Gold Bug?

The question falls to both the negative and positive perceptions of the term 'gold bug'.

The short answer is that I'm not. Philosophically I am not one of those who believes that a return to the Gold standard is imminent or desireable.

I am firmly of the belief that Gold is not money... nor is it a hedge against inflation (it performs that role very poorly).

What Gold is, however, is a hedge against the mismanagement of the state - which at this time and place is the United States with it's world's reserve currency status. And since it is almost a certainty that the United States will be forced to continue Quantative Easing, it seems clear to me that the world is going to turn to the medium of Gold on a level they haven't for almost 100 years.

Thus, as clearly as I can see the warning signs for moving out of real estate as an investment, I can also see the warning signs that Gold/Silver represent an opportunity.

The Western World has squandered the past ten years pretending that magical thinking and trillions yuan/dollars/euros/yen in new debt and consumption would create a prosperity as profligate and enduring as the fifty years between 1950 and 2000.

2001 -2010 has been a decade of "extend and pretend," and the collapse of the financial New World Order in 2008 only triggered a paroxym of more of the same: more debt, more obscuring, more obstruction, more propaganda, more facsimiles of 'reform', all launched in the name of more credit-based consumption, as if credit-based consumption was the cure instead of the disease.

As in the 1930s, the world is embarking on massive debt deleveraging process. And just like in the 1930s, governments are trying to prevent the inevitable.

And as with the the 1930s, the country that holds the world's reserve currency is in a massive debt position from which they are facing a monumental challenge which will dislodge them from their position as the reigning power in the world.

The world is becoming aware of that fact. Last week Central Banks outside of the United States cut holdings of U.S. Agency Debt by 7%.

It's only the latest example of a worldwide paradigm shift which is going to see a stunning shift into Gold/Silver as a hedge against American mismanagement.

I'm not a Gold bug... I'm a Gold/Silver opportunist. And there is a huge opportunity ahead, IMHO.

Psychological Stages of a Bubble (and our Real Estate Bubble)

(Click on image to enlarge)

This will be long and I am posting it for some colleagues of mine who have recently started to read this blog.

I came across this outline of the psychological stages of any bubble on the Irvine Housing Blog. It provides an excellent insight into understanding what is going on in the Vancouver Real Estate Bubble.

Once a bubble starts to form, it will go through several identifiable stages: enthusiasm, greed, denial, fear, capitulation, and despair.

Each of these stages is characterized by different speculator emotional states and different resulting behaviors. There are outside forces that also act on the market in predictable ways in each one of these stages. Most often, these outside factors serve to reinforce the market’s herd behavior and exacerbate changes in price.

Precipitating Factor

There is often a precipitating factor causing the initial price rally that pushes prices above their supported fundamental values. A bubble rally is usually kicked off by some exogenous event, but it may occur simply because prices have been rising and investors take notice (Vancouver in 1987 - 2001 as the success of the rising dot com bubble offered fuel to bid up real estate), or it can be merely the result of a lack of investor fear and the widespread belief prices cannot go down. In a securities market, a precipitating factor may be a very large order hitting the trading floor, and in a real estate market it may be a dramatic lowering of interest rates as it has been in our Great Housing Bubble. Regardless of its cause, the initial price rise has the potential to spark sufficient interest to prompt further buying and set a series of events in motion which repeat with a remarkable consistency. Market bubbles can be found in all financial markets and on multiple timeframes.

After a property buying binge that had been fueled by the profits of the blowing of the dot com bubble in the 1990s, came the bursting of the bubble and the terrorist attacks of September 11th, 2001.

To combat what would have been a painful recession, interest rates were dropped and remained supressed for a 10 year span of artificially low rates. 10 years of steadly decling rates produced 10 stunning years of meteoric increasing prices; pushing Vancouver Real Estate into overdrive.

As you can see by this chart of Vancouver real estate prices (a chart which starts in 1977), the start of artificially suppressed interest rates in 2001 is identical to when the real estate bubble started to kick into overdrive. (click on the image to enlarge):

Enthusiasm Stage

At the beginning of the enthusiasm stage, prices are already inflated (as Vancouver prices were from the 1990s), so there is cautious buying from traders looking for trends and momentum. If prices fail to drop to fundamental valuations and instead push higher, media attention is often drawn to the speculative market. The general public starts to take notice of the money being made by people who have bought the featured asset and they begin to participate in larger numbers. Of course, this stimulates more buying and prices continue to climb. The market sentiment turns very bullish. Buyers are everywhere and sellers are scarce. At this point, prices are completely detached from fundamental valuations, but people are not buying because of the underlying value, they are buying because prices are going up.

After 2001 condo pre-sale mania followed this pattern exactly.

In residential real estate markets, the enthusiasm stage is often greeted by lenders with open arms. With prices rising, there is little risk of loss from default. If a borrower gets in trouble, they can simply sell into rising prices, and neither party takes a loss. With neither party fearing loss, and since lenders make most of their money on the transaction itself through origination fees, there is an inevitable lowering of standards to meet market demand. This in turn creates more market demand leading to further lowering of standards. The credit cycle reinforces the bullish psychology in the market and helps push prices even higher.

Greed Stage

In the greed stage, the bullish sentiment reaches a feverish pitch and prices rise very rapidly. Every owner in the market is making money and most believe it will go on forever. As prices continue to climb, buyers become very enthusiastic about owning the asset, and they tell all their friends about their great investment. The word-of-mouth awareness and increased media coverage bring even more buyers to the market. Egomania sets in as everyone thinks she is a financial genius. Any intellectual analysis at this stage is merely a cover for emotional buying and greed.

Everyone in Vancouver knows of instances of properties receiving a dozen or more offers the day they were listed, with many in excess of the asking price. Even in the past year, this has been the story of real estate.

Most people who are bullish already own the asset, but for prices to continue to rise there must be more buying. For buying to occur, someone who was either bearish or ignorant of the rally must be convinced to buy. In other words, a greater fool must be found. Once everyone is made aware of the market rally and is convinced to buy, you simply run out of new buyers. Once there is a shortage of potential buyers, prices can only go down.

Denial Stage

This is the stage where Vancouver, and Canada, currently sits.

When the limit of affordability is reached and the pool of available buyers is exhausted, prices start to decline. At first market participants are still overwhelmed by greed, and they choose to ignore the signs that the party might be over. In 2010 our real estate market sits in this stage as prices did not drop enough 1n 2009 to cause real fear. Denial is apparent as most people still believe their home would rise in value over the next five years, and believe a house is a good investment.

Right now we are in a period where the inventory is large, houses stay on the market for a long time, and prices are too high. Sellers who refuse to lower their prices to take a small loss are in denial about the state of the market. They believe bids will increase and some buyer will come along and pay their price after all, that is the way it was just a couple of years ago.

Those Buyers who bought in the enthusiasm stage are still ahead, so they feel no urgency to sell. They have made good money already and they will hold on with hopes of making a little more. Since they believe the asset will appreciate again (and they have no exit strategy), this group of buyers does not sell.

In the denial stage of a residential real estate market, many speculators are unable to obtain the sale price they desire. The accumulation of unrealistically priced houses starts to build a large inventory of homes “hanging” over the market. Overhead supply is a condition in a financial market when many units are held for sale at prices above current market prices. Generally there will be a minor rally after the first price decline as those who missed the big rally but still believe prices will only go up enter the market and cause a short-term increase in prices.

This is what happened in the first part of 2010. This is a bear rally.

It is aptly named as those bullish on the market buy right before the bear market reverses and quickly declines. For prices to resume a sustained rally, the overhead supply must be absorbed by the market. Once prices stopped going up and actually began to fall, demand is lessened by diminished buyer enthusiasm and the contraction of credit caused by mounting lender losses. With increasing supply and diminished demand prices cannot rally to absorb the overhead supply. The overall bullish bias to market psychology has not changed much at this point, because owners are in denial about the new reality of the bear market; however, the insufficient quantity of buyers and the beginnings of a credit crunch signal the rally is over and the bubble has popped.

Fear Stage

In the grieving process there is a shift from denial to fear when the reality being denied becomes too obvious to be ignored or pushed out of awareness.

We are now on course for 4 consecutive months of declining sales. In Victoria sales are off 75%. In the Okanagan, prices are being slashed 50%. Bob Rennie slashed prices of some new condos downtown by 40% earlier this month. The market is shifting and we are near the end of the denial stage in Vancouver. What follows now is a blueprint for what lies ahead in Vancouver.

As we shift to the Fear Stage, there is no acceptance of reality, just the idea that reality might be fact. The fact that an investment might turn out to be a very poor financial decision with long-term repercussions to the speculator’s financial life is generally very difficult to accept. The imaginings of a horrifying future creates fear, and this fear causes people to make decisions regarding their investments.

The most important change in the market in the fear stage is caused by the belief that the rally is over. Price rallies are a self-sustaining price-to-price feedback loop: prices go up because rising prices induces people to buy which in turn drives prices even higher. Once it is widely believed that the rally is over, it is over. Market participants who once only cared about rising prices suddenly become concerned about valuations. Since prices are far above fundamental values and prices are not rising, there is little incentive to buy. The rally is dead.

Another major psychological change occurs in this stage after people accept the rally is dead: people reassess and change their relationship to debt. During the rally, debt becomes a means to take a position in the housing commodity market. Nobody cares how much they are borrowing because they never intend to pay off the loan through payments from their wage income. Most believe they will pay off whatever they borrow in the future when they sell the house for more than they paid. Once prices stop going up, people realize they are simply renting from the bank, and the only way to get ahead and build equity is to pay off a mortgage. The desire to borrow 8 to 10 times income diminishes rapidly as people realize they could never pay off such a large sum. What started in the denial stage as an involuntary contraction of credit, in the fear stage becomes a voluntary contraction of credit as people simply do not want to borrow such large amounts of money.

By the time a financial market enters the fear stage, greed stage buyers are seriously underwater. Comparable properties may be selling for 10% less than their breakeven price, and there is little hope that prices will rally. Some sell at this point and take a loss, but most do not. People who bought in the enthusiasm stage come up to their breakeven price and face the same decision the greed stage buyers faced earlier: sell now or hold out for a rally. Even though there is good reason to fear, most do not sell here. They regret it later, but they hold on. Speculators generally only sell an asset when the pain of loss becomes acute. The pain threshold is different for each individual, but there is no real pain until the investment is worth less than the purchase price, so few sell for a profit or at breakeven. Inventories grow in the fear stage because many would like to sell, but sales volumes are light because few are willing to sell at prices buyers are willing to pay.

Prices do not rally here because there are even fewer buyers in the market and a reduced appetite for debt due to the change in market psychology. There are more and more sellers either choosing to sell or being forced to sell, and since there are more sellers than buyers, prices continue to drop. During the fear stage, a majority of buyers during the rally go underwater on their mortgages and endure the associated pain and stress. In the past, since the bubbles of the 80s and 90s were largely built on conventional mortgages, people just held on. During the Great Housing Bubble, people used exotic loan financing terms, and they simply could not afford to make their payments. They borrowed from other sources until their credit lines were exhausted and they imploded in foreclosure and bankruptcy. During this stage many renters who would otherwise have purchased a home put off their purchase and save more money because they correctly see the decline in prices has momentum and prices should continue to drop further.

Capitulation Stage

The transition from the fear stage to the capitulation stage is caused by the infectious belief that the rally is over. There is a tipping point where a critical mass of market participants either decide to sell or are forced to sell. In residential real estate, people are compelled to sell by anxiety, and the mechanism for force is foreclosure. Once a critical mass of selling is reached, the selling causes prices to decline further which in turn causes more selling. This convinces even more people the rally is over yielding even more selling: a downward spiral. The same price-to-price feedback mechanism that served to drive prices up during the rally works to drive prices down during the crash. Collectively, everyone in the market accepts prices are going to drop further, and they need to get out: Now!

Of course when everyone knows prices are going to drop, and everyone is trying to sell, there are very few buyers. Each market participant has a different threshold for pain. Some give up early; some give up later; some stubbornly try to hold on, but in the end, by choice or by force, everyone who cannot afford their home sells out and capitulates to the forces of the market. Each seller accepts the market rally was a bubble, and the frenzy of selling activity clears out the overhead supply. The capitulation stage is the counterpart of the greed stage. Sellers are everywhere and buyers are scarce. This puts prices into free-fall until a critical mass of buyers is ready to buy again.

Despair Stage

From a perspective of market psychology, it is difficult to tell when the capitulation stage ends and the despair stage begins. Both stages have an extremely negative bearish sentiment. It is called the despair stage because most who own the asset are in despair and wish they did not own it, and the general public is still selling. Most who still own their homes are able to afford the monthly payments, but realize they will face a large loss if they sell their house anytime soon. They feel like prisoners in their own homes because they are unable to relocate for a better job or any other reason. One distinguishing feature of the despair stage is the increased buying activity of investors–true investors, not the speculators who were wiped out during the price decline. Investors are not in despair during this stage. This is the time they were anticipating to make their purchases.

The unwinding of any bubble usually takes the same amount of time it took to build up.

I believe the Vancouver Bubble started to build in 1987 and took off in earnest in 2001. That's 23 years. I believe the Vancouver market will unwind over the next 20 years and values will fall to what they were in the mid 1980s.

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JUMP!

Depression seems to be the order of the weekend in the Village on the Edge of the Rainforest.

On three separate occasions this weekend, bridges into the downtown core of the city were shut down because of potential jumpers. Was it the return of the ever incessant fall/winter/spring rains? Or are homeowners finally beginning to grasp what is happening in real estate?

Mainstream media has been all abuzz recently, finally discussing the possible existence of a Canadian housing bubble. Three consecutive months of dramatically dropping sales will do that. And with September shaping up to be a fourth consecutive month (with September sales currently on target to be 45% below this time last year), we watched the R/E spin doctors adopt an interesting tact to rationalize last months dismal figures.

Each month all year long the CREA and the BCREA have been comparing data with the same month from the previous year, an approach that hasn't been pretty particularly since 2009 (with it's stimulus induced sales) set many sales records.

How to deal with all this negative press? Change the way you look at the statistics, of course!

As a result this month's 'analysis' of the sales data had a curious twist. Rather than compare data with last year (which would suggest sales were down 40% from the same time last year), the R/E associations reported that August sales were up 4.1% on a seasonally adjusted basis from July (which had been a really bad month for home sales because of the effects of the harmonized sales tax implementation in Ontario and British Columbia).

Pesto-chango! And a drop of 40% becomes a rebound of 4.1%. Statistics are such fun, aren't they?

But the fun doesn't end there. On the newscasts this week came this gushing report that this 'rebound' could mean the buyer's market is ending and insinuations that you best snap something up right now... before it's too late.

Maybe that's why there were so many bridge jumpers this weekend, young buyers got sucked into this malarky and are regretting it already. 'Helllloooooo' down there.

Spin aside, months of inventory is double what it was last year and with the exception of 2008, the last four months of sales have been the lowest in 15 years in both Greater Vancouver and the Fraser Valley.

And to the chagrin of the BCREA/CREA, national media picked up on this Financial Post story which dismissed their manipulative claims of an increase in August and headlined that this 'rebound' won't last long.

Don Lawby, chief executive of Century 21 Canada, confirmed the gloomy fall outlook the spin meisters are attempting to counter saying, "I don't think it's going to be a great fall market. But to what degree [it falls], I don't know yet. It sure isn't going to compare with last fall. It's going to be down."

Desperate State of Affairs Outside the Lower Mainland

Early this morning a work colleague and I hooked up for coffee and he was stunned to watch yesterday's clip on a 75% collapse in sales in Victoria.

The fact of the matter is the general public is only just now beginning to grasp what is going on in the market.

He was equally surprised to hear about what is going on in the Okanagan. As this beginning of the month Globe and Mail article outlines, real estate in the Okanagan has hit incredible hard times as the collapsing economy has lead to an evaporation of buyers.

“We are definitely beating the market, and it’s because of financial stability,” says Howard Kruschke, senior director of sales at Kelowna's Predator Ridge. “It’s changed dramatically over the last couple of years – the consumer wants to know where the money is coming from. The consumer doesn’t want the risk of, ‘we’re going to do that in the future.’ They’re not willing to take that leap anymore.”

Developers throughout the region are routinely offering slashed prices and incentives right now that range from free accommodation on open house weekends to zero mortgage payments for a year.

Vancouver developer Rob Chetner entered the recreational property market at its peak, with an ultra high-end 20-home Kelowna waterfront complex complete with private dock, private beach, geothermal heating, outdoor kitchens, and heated salt water pool. A couple of years ago, presales for the Waterfront sold from $1.7-million to $2.2-million. But by the completion date of summer 2009, the market had tanked and all but one presale deal fell through.

Today, 11 of the units have sold with price reductions. A unit that was previously priced at $1.7-million is now listed at $979,000... almost 50% off the original asking price.

"Hello, my name is Greg Andruff..."

Last Saturday I made a post about realtor Greg Andruff who had used his new blog to dismiss the concept of a housing bubble in the Vancouver market.

Among the items in the email inbasket this week was a classy response from Mr. Andruff to that post:

• "Thanks for posting my Blog. I got a chance to check out your sight and found it really interesting. I will be sure to keep an eye on what your doing as I have only been in the blog game for a few weeks and I am still trying to get a feel for what it is all about. Any tips for a rookie?"

Hmmm... don't allow yourself to become fodder for the blogosphere?

Since he asked, I suggested two things.

First I told him I personally admire realtor's like Larry Yatkowsky who use their blog to both inform and promote their community. Larry attempts to provide information for clients (and potential clients) that doesn't always follow the 'spin' on the current market put forward by CREA or BCREA. This engenders a significant amount of respect which tends to translate into a perception of 'trust' which augers well for his longterm business.

The second point I suggested was that the direction of real estate in the coming months/years was a topic of great interest for a great many people. Since he's started off by offering his opinion on that direction (with his 'myth of a housing bubble' post), I encouraged him to follow up by offering his rationalizations for where he believes that direction will be taking us.

I'll keep you posted on any updates he may offer.

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Greenspan: "Time to let the markets power recovery"

Yesterday I made a post about former US Federal Reserve Chairman Alan Greenspan's speech to the Council on Foreign Relations in New York.

Greenspan made some interesting comments about Gold, but that wasn't the only point of interest.

Of particular note for real estate observers in the Village on the Edge of the Rainforest, were comments made about government stimulus.

The still influential Greenspan said fiscal stimulus efforts have fallen far short of expectations, and the government now needs to get out of the way and allow businesses and markets to power the recovery.

“We have to find a way to simmer down the extent of activism that is going on” with government stimulus spending “and allow the economy to heal” itself.

At this point, “we’d probably be better off doing less than more” because “you’d be far better off to allow the normal market forces to operate here," Greenspan said. That’s largely because stimulus spending is not proving as effective as many had hoped. “To the extent the evidence suggests very large deficits concurrently crowd out capital investment, there is a debit to the stimulus program that is somewhere between a third and a half of what the gross stimulus is,” he said.

Greenspan said that the U.S. needs to do something now to deal with budget deficits and it must do something very soon. He explained his anxiety is so high that “I’m coming out in the first time in my memory” in support of higher taxes in addition to reduced spending, including allowing the so-called Bush tax cuts to expire.

“Our choice is not between good and bad; it’s between terrible and worse,” Greenspan said. The nation has “a level of commitment... which I don’t think we can psychically meet,” absent huge changes in how the government finances itself.

These are, once again, stunning statements with potentially massive reprecussions for Vancouver.

The ONLY reason interest rates are so low is because of government intervention.

Given the current state of the worldwide economy and the capital demands of governments, if interest rates were let to float to market level the impact would be profound.

Rates would, at the very least, return to their historical norm over the last twenty years of 8.25%. Government has been manipulating those rates for the last 10 years and the time for that intervention is coming to an end.

When this all plays out, Vancouver real estate is going to implode on a level even the staunchest of bears cannot fathom.

Meanwhile in Victoria

Vancouver has had three consecutive months of dismal real estate sales and September is shaping up to make it four in a row with sales down about 40% from last year.

But that's nothing compared to Victoria where September is on track for a collapse in sales of 75%.

And finally, from the Hyperinflation Debate

Harry Schultz, author of the famous International Harry Schultz Letter [IHSL], has had a long and colourful financial career.

Much like Gonzalo Lira, he is fascinated by the possibility that hyperinflation might be triggered quickly, by a sort of global financial traffic accident. Back on June 10th, 2010 he wrote:

• "We (collectively) are poised at a heart-stopping moment in economic times. On the one extreme side, the world is on the edge of massive deflation and depression. At the other extreme ... hyperinflation. My view is: Both these extremes are possible. Certainly deflation is, on balance, in play today and gaining ground as money supply is actually declining! Hyperinflation seems impossible when there is not much inflation in most economies. But... hyperinflation is a monetary event, not an economic one, and will happen on an overnight basis, not via a general uptrend in inflation data."

At age 89, Schultz is winding up his businesses and will wind up his IHSL at the end of this year. In the latest letter he summarizing the account of how hyperinflation could happen by Gonzalo Lira and describes Lira's scenario as “a genuine risk” and comments:

• “Hyperinflation can be triggered in several other ways. Trustfailure (my new word) is the controlling element, which triggers Fearflation (another new word). E.g., a Comex gold delivery default or a major Too-Big-To-Fail bank failure or a self-propelling domino bank-run are all possible triggers. A bond market implosion will result from any of the above, even if it isn’t itself the trigger.”

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Is Gold a 'canary in the coalmine'?

Fascinating OP ED piece yesterday in the New York Sun newspaper.

Alan Greenspan was at the Council on Foreign Relations in New York City and also gave a speech.

Among his remarks, according to the Sun, was a statement by Greenspan that central bankers should be paying attention to gold (which, as you know, is something this blog recommends as well).

Asked why Gold was hitting new highs, here is what Greenspan had to say;

“Fiat money has no place to go but gold."

Greenspan said that he’d thought a lot about gold prices over the years and decided the supply and demand explanations treating gold like other commodities “simply don’t pan out.”

Greenspan concluded that gold is simply different.

At one point during his speech, Greenspan spoke of how, during World War II, the Allies going into North Africa found gold was insisted on in the payment of bribes. Said the former Fed chairman: “If all currencies are moving up or down together, the question is: relative to what? Gold is the canary in the coal mine. It signals problems with respect to currency markets."

I will say it again, the biggest and most confounding debate that's going on right now in all of finance is determining what the final outcome of the US Federal Reserve's market manipulative actions will be.

Gold is sending out a very strong signal and Greenspan says, "central banks should pay attention to it.”

So should you.

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Bubble Busting, Hyper Analyzing and Insight

First up today is more bubble denial. Today's treatsie first came to me via our friends at VREAA (although I am told it was posted earlier on the chatboard Real Estate Talks by contibutor SethM).

Back on September 7th, 2010 Pierre Marchildon, of Marchildon Property Investment Partners, posted a video commentary, The Vancouver Real Estate “Bubble”. Marchildon dismisses all this bubble talk and explains how there are merely ups and downs in the market. No crash, no collapse.

“A bubble is when there is a major dramatic drop… but you can see there is a bunch of ups and downs on their way up. Every decade, real estate doubles… that’s the point of this exercise. Don’t try to time the market.”

Translation: Buy now or be priced out forever!

Here is Marchildon's analysis (and don't tell Pierre that the entire graph he's pointing to is the first half of the bubble)...

Meanwhile Gonzalo Lira has come out with another post on Hyperinflation titled "Was Stagflation in 1979 really Hyperinflation?"

As I said two days ago, the biggest and most confounding debate that's going on right now in all of finance is determining what the final outcome of the US Federal Reserve's market manipulative actions will be.

Once again Lira has made some interesting points and, if the topic interests you, I invite you to visit his blog and read his lengthy post.

Finally some insight from an article in Macleans magazine.

In an article in the latest issue titled 'Canada should take no solace from America's woes', comes these tidbits...

• Canadian economists Derek Holt and Gorica Djeric of Scotia Capital recently observed that most commentators are “overly sanguine with respect to the state of Canadian household finances.” Debt as a share of personal disposable income for Canadian households is at record levels, they note. While the U.S. reduces its household debt load through forced austerity measures, Canada’s number keeps getting bigger. And by some measures, the trajectory of house prices in Canada appears strikingly similar to that in the U.S. prior to the bust.

But that's okay, it's different here (TM).

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Hey... did you hear? The Vancouver R/E decline is OVER!

Tis true folks. According to the real estate 'pumper-in-chief', CREA's Cameron Muir, "the number of new residential listings in the province has fallen 30% since April. With fewer new listings, total active listings are now on the decline, signaling that an end to the buyer’s market may be on the horizon."

Woohoo... perhaps Andruff was right and it IS time to pack in the blog.

Meanwhile let's turn our attention to the inflation that isn't (because government doesn't count it anymore).

The quantitative easing and stimulus money are working their way into the commodity sector which is allowing the dogs of inflation to slip their leashes and work their havoc.

Take a look at the way food prices are being driven to unseemly high levels once again just as they were in 2008.

Corn is coming up on $5.00, wheat is more than $7.00, soybeans are over $10, sugar is over $0.24/pound, cotton is closing in on $1.00, coffee is up near $2.00 pound wholesale (which is a 13 year high), cattle are just shy of $1.00/pound, bellies are trading over $1.50/pound for fresh product.

What does it all mean? It means the consumer is on the verge of watching his disposal income be decimated by high food prices. In Canada this comes at a time when most Canadians are living paycheque to paycheque and are saddled with the highest levels of household/mortgage debt ever. Disposable income is at an all time low. In the USA, a record number of Americans are on food stamps and are either unemployed or underemployed.

The only saving grace is that energy prices have not YET begun moving up alongside the rest of the commodity complex. But it's only a matter of time. When the crude complex gets involved you will see home heating bills, home cooling bills, industrial energy costs and gasoline prices join the list of soaring costs nationwide.

But don't worry. None of this counts towards the Consumer Price Index anymore. Thus... there is no inflation.

The technical term is 'Cost Push Inflation'. And it's insidious havoc is silently taking root.

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Deflation, Inflation or Hyperinflation?

I had a post yesterday regarding local real estate for you, but I have set it aside for now.

A couple of weeks ago, on August 24th, I made a post (which you can read here) on a theoretical framework for the arrival of hyperinflation. It was reprinted from the blog of Gonzalo Lira and Lira's thread went viral on the internet.

One of the reasons it garnered so much attention is because the issue cuts to the biggest and most confounding debate that's going on right now in all of finance: what will the final outcome of the Fed's market manipulative actions be?

Will the end result be deflation, inflation or hyperinflation (which is a distinctly different phenomenon from either of deflation or inflation).

Lira's post infuriated some hard core deflationists who continue to refuse to acknowledge the possibility that in its attempt to inspire inflation at all costs, the Fed may just push things beyond the tipping point of monetary imprudence.

Recently Mish Shedlock came out with a rebuttal to Lira in a podcast on Global Edge with Eric Townsend and Michael Hampton. In the podcast, Shedlock's conclusion was that Hyperinflation is the endgame, "so it is unlikely."

Mish followed this up with a post on his blog.

Yesterday Lira responded saying that Shedlock had turned the issue into a personal attack and that Mish had taken many of his points out of context (you can see a portion of Lira's response in yesterday's comments section). Lira has proposed an open debate with Mish on the topic. We will see if Mish accepts.

I bring all of this up because it triggered a comment in yesterday's comments section AND a whole whack of emails to my inbox.

As I said at the start of this post, this topic is THE biggest and most confounding debate that's going on right now in all of finance.

With that in mind I note that John Williams has come out with another bold statement today.

John Williams runs a website (www.shadowstats.com) on which he provides a stunning amount of real, unmanipulated government data.

Williams received an A.B. in Economics, cum laude, from Dartmouth College in 1971, and was awarded a M.B.A. from Dartmouth's Amos Tuck School of Business Administration in 1972, where he was named an Edward Tuck Scholar. For nearly 30 years he has been a private consulting economist specializing in government economic reporting.

His website, Shadow Stats, often paints a dramatically different picture of the state of the economy from the spin offered by government. Williams will, for example, offer you statistics on the Consumer Price Index as it existed prior to 2000. That was the year the formula for calculating inflation was changed. If you were to calculate inflation today using the same formula used before 2000, the rate is in excess of 6%!

Considering we are now force-fed statistics that pacify the masses by stating there is not inflation, that is significant.

Of course it's because the government has changed the way that figure is now calculated so - voila! - there is no inflation (even though you are feeling it in your pocketbook).

The impact of this cannot be understated. Inflation is just as present now as it was in the early 1970s. The only difference is the government now claims that many of those higher costs simply don't count (four legs good, two legs bad becomes four legs good, two legs better).

John Williams is yet another economist who has stated his firm believe that hyperinflation is in the offing. In 2009 he put out this analysis.

And today he has just released a note to clients in which he warns that hyperinflation may hit as soon as 6 to 9 months from today.

With so many established economists and pundits seeing nothing but deflation as far as the eye can see, and the US Federal Reserve doing all in its power to halt the deleveraging cycle, both in the open and shadow economies, what is Williams' argument?

Here, if you interested, is the statement from John Williams. I personally think it is important to read the likes of Lira, Shedlock and Williams to try and understand this important debate and make up your own mind on this critical economic issue.

Excerpts from statement from John Williams of the blog Shadow Stats

• SUMMARY OUTLOOK: Systemic Turmoil is Unthinkable, Unacceptable but Unavoidable.
  
  Pardon the use of the Aerosmith lyrics in the opening headers, but the image of tap-dancing on a land mine pretty much describes what the Federal Reserve and the U.S. Government have been doing in order to prevent a systemic collapse in the last couple of years. Now, as business activity sinks anew, much expanded supportive measures will be needed to maintain short-term systemic stability. Such official actions, however, in combination with global perceptions of limited U.S. fiscal flexibility, likely will trigger massive flight from the U.S. dollar and force the Federal Reserve into heavy monetization of otherwise unwanted U.S. Treasury debt. When that land mine explodes — probably within the next six-to-nine months, the onset of a U.S. hyperinflation will be in place, with severe economic, social and political consequences that will follow. The Hyperinflation Special Report is referenced for broad background. The general outlook is not changed.
  

What does this mean for US financial markets?

• In these circumstances, the financial markets likely will be highly unstable and volatile. Looking at the longer term, strategies aimed at preserving wealth and assets continue to make sense. For those who have their assets denominated in U.S. dollars, physical gold and silver remain primary hedges, as do stronger currencies such as the Canadian and Australian dollars and the Swiss franc. Holding assets outside the U.S. also may have some benefits.

If the Lira/Shedlock debate comes together, I'll let you know.

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Debunking the myth of the Vancouver Real Estate Bubble!

Perhaps we can retitle this post: "My Daddy sold real estate and now so do I, so listen up!"

Vancouver Realtor Greg Andruff proudly proclaims on his website, "I sell houses on the Westside." As such he's not too impressed with all this talk about a Vancouver Housing Bubble, a condition he proclaims is a 'myth'.

And Greg has the experience to make such a claim. From his website citing his qualifications:

• After growing up in a “Real Estate Family” and many years in the service industry, Greg decided to prepare himself to join his family’s business by working for a year in the conveyancing department of one of the top real estate conveyancing law firms in Vancouver. Greg then achieved his real estate license as a Residential Sales Representative and joined (the family business) to continue with his passion of great service.

Today our buddy Greg proudly sets out to 'Debunk the Bubble' on his website.

After citing the Canadian Centre for Policy Alternatives published study 'Canada’s Housing Bubble: An Accident Waiting to Happen', Andruff tells us there are holes in the bubble plan because,"As a Vancouver Realtor® I can only comment on my knowledge and experiences from the point of view of the Vancouver Market."

I don't think it will come as much of a surprise that Andruff's point of view is that all this 'bubble talk' is hurting business and is, therefore, a bunch of B*llsh*t!

Andruff dismisses concerns about overextended buyers and the other concerns about the state of our market by telling us that "in Canada we do have several intelligent organizations closely monitoring these “factors” to ensure that we do not follow the American path."

You can follow the link to the read his weak analysis for yourself.

Andruff says that "the Vancouver market is not currently approaching any triggers to burst a bubble such as wide spread job loss or a rapidly rising interest rates. Vancouver’s housing inventory is balanced. Interest rates are at historic lows (they will go up eventually just yesterday short term rates when up a quarter point) but at the moment they are remaining relatively flat (and fixed rate mortgages have recently dropped). We will likely see slow and moderate growth and we are currently experiencing high net migration of wealthy 'high net worth' Asian immigrants creating demand that is currently being met with a somewhat balanced supply of housing stock. "

Bottom line: we're immune from the evolving worldwide economic collapse and we've got that 'hot asian money' coming in.

Gee Gary... thanks for that. How could I possibly see things differently after that explaination.

Guess I will pack the blog in now.

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Hmmm...

A couple of random thoughts today.

If you come to this blog, I think it's a pretty safe bet you are aware of what is going on in real estate right now.

For Vancouver, September is shaping up to be another dismal month for sales with today being horrendous.

Sales results for all of Vancouver on September 9th indicate there were 274 new listings, 103 price reductions and only 69 sales.

Granted this is not indicitive of every day this month (it's actually the lowest number of sales in a day so far this month). But the totals for the other days of September are not going well either. After 3 consecutive dismal months, the fact of the matter is that September is trending to make it four consecutive months.

Even the ever upbeat real estate industry can't gloss over what is going on.

Which brings us to to this tidbit from another colleague of mine who happens to be on an email list for a realtor friend of his.

As a measure of the state of the market, here is an excerpt from the latest missive to his clients:

• Hello again! I hope you had a great summer and enjoyed the spectacular weather we had. With the end of Summer comes Fall and in terms of the real estate market, the start of the 2nd most active time seasonally. However, given the current market conditions such as tighter lending guidelines, the application of the HST on the new sales and mortgage rates which are higher than they were in the Spring, we may not experience much of a fall strengthening. In fact, as concerns about our real estate "bubble" become public via various media sources we may experience a continued slowing of our market through the Fall. This month I have decided to share with you some of the media stories on the state of our real estate market below. Feel free to call or email me if you have any questions or concerns. Have a great September! Cheers!

Links are then provided to various youtube clips of the news stories on Global and BNN which have chronicled the stagnating market.

Awareness is starting to permeate the masses but there is still a general lack of understanding of the state of the market within the mindset of the average joe. Media coverage may be picking up, but the 'man on the street' is still oblivious.

And the general public is even more oblivious to the overall state of the average homeowner's balance sheet.

In case you didn't catch it, there was a stunning tidbit from Scotia Capital and a report they recently released on the risk posed by household debt on the economy.

We are in a period of record low interest rates. While this should mean Canadians are realizing a ton of savings during this period of near-zero interest rates, they aren't. The low rates (and the prodding by the pimps of the R/E industry) have induced Canadians to rush into home ownership by buying the maximum amount of house they could afford.

This is, of course, what has caused housing values to soar.

But, as Scotia Bank notes, the end result is that mortgage principal payments as a share of income are now double what they were in the early 1990s (a time when interest rates were in double-digit territory).

This means that despite nearly two decades of declining interest rates (with rates now as low as they can go, Canadians have saddled themselves with record levels of payments that they must shell out each month.

Consider that as the economic recovery struggles to gain any traction.

Our consumer based economy is founding and consumers aren't consuming largely because the monthly mortgage payments of Canadians (as a share of their monthly income) is twice what it was 20 years ago. There simply isn't much money left over to jump start the consumer economy.

Yet the consensus is that everything is alright.

Doesn't anyone see the ominous conditions looming on the horizon?

Consider...

If the main tool government uses to control inflation is to raise interest rates - and you believe government won't ever raise interest rates because of the havoc that will trigger on the economy - does that mean that government will be powerless to contain and control inflation in the coming months and years because they will never raise rates?

Or do people simply assume that interest rates will never go up AND inflation will never again rear it's ugly head?

That must mean they assume, by extension, that the economy will never recover.

But if that's the case, how the hell do they figure real estate will keep going up year after year?

Hmmm...

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A trio of thoughts...

Three different thoughts for you today.

First off is the Bank of Canada rate increase today of a quarter point to 1%. This is the third consecutive increase in rates and the BOC rate is now quadruple what it was four months ago.

The focus today is on the language used by the Governor, Mark Carney. Everyone seems to think the message is that this will be the last rate hike for a while.

But as the Globe and Mail noted today, that may not be the case.

• The central bank said, the global bounce-back from the worst downturn since the Depression is "proceeding but remains uneven, balancing strong activity in emerging market economies" (such as China and India, though the central bank didn’t name them) against "weak growth in some advanced economies."
  
  At the same time, the central bank appeared to downplay the effect that the global turmoil is having on Canada, calling the country’s 2-per-cent annual growth rate in the second quarter "slightly softer" than what policy makers had expected, even though their latest forecast in July was for a 3-per-cent pace.
  
  The Canadian recovery will be "slightly more gradual" than the central bank expected in July, but consumer spending and investment have "evolved largely as anticipated," it said, reflecting the fact Mr. Carney’s forecasts have warned of a slowdown for several months because of factors such as the fading impact of government stimulus and the cooler real-estate market.
  
  In the future, consumption growth will "remain solid" and business investment - which had a surprisingly strong pickup in the second quarter, Statistics Canada data last week showed - will "rise strongly," the central bank said. For now, as the U.S. recovery proceeds in fits and starts, investor demand for safer investments such as bonds is pushing borrowing costs down and helping consumers and companies, the bank noted.
  
  "Financial conditions in Canada have tightened modestly but remain exceptionally stimulative," the central bank said. Policy makers also said dynamics affecting inflation in the country-- which has been tame for months - are "essentially unchanged" from their July forecast.

As the Globe notes, all this suggests that the Bank of Canada is still uncomfortable with an overnight lending rate so far away from what most economists consider "neutral," or about 3.5% to 4%.

Both the Globe and I took Carney’s comments on the Canadian economy as a sign the BOC still leans towards raising rates.

On another front, I attend a retirement luncheon today where one retiring colleague, age 60, was asked about several properties he owns and whether he intends to sell any of them (two houses in the Dunbar area and a vacation property).

Naturally I offered my opinion.

His response? "Every time I talked about buying, I was told I was making a mistake, that prices were going to be going down. They were the best moves I could have ever made. I'm content to sit on what I have, I can afford to wait out a 5 year recession"

A comment I think speaks volumes.

Despite the continuing coverage of a possible housing bubble in Canada, and the lessons of the United States, the general public is still completely oblivious to what is going on and the paradigm shift that is taking place.

Finally there is the North Delta condo for sale by a friend that I mentioned in yesterday's post.

Spoke with him today and he said he didn't mind if I gave some more information on this blog. Believing that any publicity is good publicity, he sent me the MLS listing link which you can see here.

Curiously the property is still listed at $144,000 on MLS, but on other sites the price has been reduced to $139,000.

Bought about 5 years ago for $54,000, my friend (who does read this blog) is firm in his belief that this almost 40 year old property (although completely renovated) is worth the price he is asking and he is hesitant to consider offers much below that price.

He dropped the asking price from $144,000 to $139,000 (the price which he feels is the lowest he is prepared to go) because the MLS listing has received zero hits in the past 3 weeks.

I told him that the vast majority of people who visit this site may boost traffic numbers to the listing, but I suspect few would be interested in meeting his price.

As he reiterated to me, any publicity is good publicity.

I'll let you know how he makes out.

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We will pay you to take out a mortgage!

Just before the housing bubble collapsed in the United States, real estate mortgages had reached absurb proportions.

You could actually buy a house with nothing down and get money back from the bank when you bought... in essence you could get paid to buy a house.

One of the items making the rounds in the Canadian blogoshpere today is this article in the Globe and Mail which notes that Canadian banks are struggling to boost loans as demand ebbs in the weak economic rebound.

• Royal Bank chief executive officer Gordon Nixon said the banks must now find ways to build their lending operations – a key driver of their profits – without being coaxed into making unattractive loans just to get more business in the door.
  
  “What you hope you don’t see happen is banks starting to do stupid things again,” Mr. Nixon said in an interview, referring to the past several years where credit was easy to come by, and banks around the world were all too eager to lend.
  
  “Right now we’re in an environment where demand for credit is very, very low... It’s not that credit isn’t available – there’s not a lot of demand.”

Well I've got news for Mr. Nixon. Canadian banks are doing stupid things as he says this.

In the comments section from yesterday's post comes this link from Rob to an offer from CIBC.

Seems CIBC will you cash back based on your mortgage amount and term, and is available if you are approved for a 3, 4, 5, 7 or 10-year closed, fixed-rate residential mortgage. For example, if you have a $500,000 mortgage and select a 10-year term, you will receive 7% cash back, or $35,000!

And since your 5% downpayment is only $25,000, you can basically buy the home with nothing down and get PAID $10,000 for making the purchase.

Good thing our conservative banks aren't making the same mistakes the Americans did. Again I ask, is it so hard to see what is coming?

Meanwhile I am watching with keen interest as a colleague attempts to sell his one bedroom condo.

He bought the condo several years ago for %54,000 and has moved his girlfriend's house. As a result, the condo has been listed for sale.

After consulting with his realtor, the property was listed for $144,000 - right in the middle of the price range for what comparable apartments were selling for.

So I asked him, "if you get a low ball offer, what would you accept?"

His reply was that he would go as low as $139,000!

Now that's a measly 3.5%, but perhaps that sums up the current mindset of sellers right now. Despite having paid only $54,000 a few years ago, he firmly believes his property is worth almost three times what he paid. And he isn't prepared to move on the price... because 'that's what it's worth'.

Of course... that was three weeks ago.

After receiving the sum total of ZERO hits on the MLS listing, his realtor recommended adjusting the asking price.

This week it was dropped to $139,000. No comment on if he's adjusting the amount at which he is willing to accept.

I'll keep you updated on how things go.

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Where to now?

In the United States, the economy in general, and real estate specifically, is about to enter a critical phase.

Over the last 18 months, America has rolled out just about every program it could think of to prop up the ailing housing market. Tax credits, mortgage modification programs, low interest rates, government-backed loans and other assistance. All of it was intended to keep values up and delinquent borrowers out of foreclosure.

The objective has been to stabilize the market until a resurgent economy created new households that demanded places to live, thus reflating the housing market.

This, btw, is not too far off the mark from the strategy that has been employed in Canada.

But the economic recovery is nowhere to be found.

And as the anemic economy sputters and the stimulus wanes, housing sales in the United States have plunged again. In July US housing sales sank 26% from July 2009 and there is a growing sense of exhaustion with government intervention.

Politicians made a bet that a rising economy would solve the housing problem. But several years into the financial crisis they are out of options and they don’t really know what to do.

Now some economists and analysts are urging a dose of shock therapy: let the housing market float on it's own. And if it crashes, so be it. When prices are lower, these experts argue, buyers will pour in, creating the elusive stability the government has spent billions upon billions trying to achieve.

In Canada, after a brief hiatus, Canadians continued on with it's housing bubble due to direct government intervention. Lured by cheap money, we have carried on buying houses we can’t really afford.

And because we have taken advantage of historic low interest rates to maintain spending our nation now has the highest consumer debt to financial asset ratio among 10 OECD countries, including the U.S.

So dire is that debt situation that, according to the Canadian Association of Accredited Mortgage Professionals, 375,000 mortgage holders in Canada are already challenged by their current payments and may not be able to handle higher rates.

Think about that for a minute... interest rates at the lowest point in history and 375,000 mortgage holders have so badly plunged themselves into debt by buying the maximum amount of house they could afford that they may not be able to handle higher rates?

The Bank of Canada is well aware of the precarious position Canadians have placed themselves in and have spent the better part of the last six months issuing warnings to Canadians to be careful - and to prepare for an end to these emergency interest rate levels.

Now... the time may have come let the Canadian housing market float on it's own.

“The need to take the Canadian consumer away from the credit punchbowl remains a pressing one,” says Bank of America Merril Lynch, which is why you will see the Bank of Canada hike the interest rate again on Wednesday (and will keep hiking rates for the time being).

Minor mortgage rule changes, the HST and two simple rate increases by the Bank of Canada have plunged housing sales downward the past three months. And still there are calls for the Bank of Canada to keep raising rates.

The C.D. Howe Institute’s monetary policy council said last week that the bank should raise its“overnight rate (the short-term rate it targets for monetary policy purposes) from 0.75% to 1% on Tuesday and keep on hiking it until it reaches 2.25% a year from now.

In its statement, the monetary council said the recommendation “reflected a view that the Bank of Canada should continue to unwind the emergency measures adopted after the 2008 financial crisis.”

Carney spent the first half of the year issuing warnings of what was coming. And now that punchbowl is going to be gradually taken away.

Is it really so hard to see how things are going to play out?

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And the walls... came tumbling down.

Last month we talked about how Vancouver's Condo King, Bob Rennie, was involved in developments in Kelowna (Invue) and Vancouver (Fairmont Estates) that were slashing prices by 40% and we wondered... is Rennie simply moving to get ahead of a crash he can see coming down the pike?

Since Rennie's Kelowna move there have been 3 consecutive months of decade low sales stats.

Tales abound of stagnating conditions throughout the Okanagan.

And now more evidence that the market on the periphery of the Village on the Edge of the Rainforest is collapsing.

Could it be Rennie has accurately anticipated the market?

As you can see on this realtor website, the 40% correction (as a start to the great real estate collapse) has now come to Whistler.

One of the suites in the luxury Four Seasons development at the base of Blackcomb Mountain (which sold in 2002 for $400,000) has sold in a court ordered sale for $250,000, more than 40% off the original 2002 price.

And with tourism down dramatically from an American economy in tatters combined with the negative press from a bankrupt ski resort prominent in people's minds, are more such sales all that unexpected?

Meanwhile, on the Sunshine Coast, statistics from the Real Estate Board of Greater Vancouver show that the benchmark price for detached homes is down by 14% in one single month! A precipitous mounting collapse if the trend continues.

Mainstream media are now picking up on the story, and as news stories trumpet the collapse, no amount of R/E cheerleading is going to lure potential buyers who fear they may be catching a falling knife.

Surrounded by real estate that is starting to collapse, is Vancouver really different from everywhere else?

On September 8th the Bank of Canada will be announcing their next move. Speculation is that interest rates will rise another .25%.

What will another rise in interest rates do?

Will the upper end of Boomers, those within five years of retirement - 70% of whom have no funds set aside for retirement and are dependant on cashing in on their bubble inflated real estate - realize what is going on around them?

Will they begin a dash to list their homes for sale in advance of their planned retirement?

Having paid $60,000 for a westside home 40 years ago which is now appraised at $1,600,000; how many will slash their asking price dramatically knowing they are still realizing a massive profit but must cash out now before the market crashes?

There is still time to salvage their retirement plans if they move aggressively, but the clock is ticking fast.

On the real estate chat boards there is some evidence that dramatic action may already be occuring in other parts of the Lower Mainland.

Posts talked about a listing at 1405 Apel Drive, Oxford Heights in Port Coquitlam. From the listing:

"Beautifully renovated 5-Bedroom Home in the prestigious Oxford Heights neighbourhood of Port Coquitlam. Bright and sunny backyard, great floor plan and room for everyone! This home is a MUST SEE! Just steps to an elementary school, parks, nature trails & transit, and just a short drive down the hill to shopping, groceries, restaurants and coffee shops. Fully fenced yard with loads of room for the kids to play!"

Listed for the below market price of $379,900, the MLS listing (V848662) appears to no longer be available. Was it immediately snapped up as a way below market opportunity - setting the benchmark for what is to come?

And if we see similar 'rush-to-sells' - moves which will almost assuredly push prices down 30-40% right off the bat - what will become of all those who bought in the last three years with 5% down? Those 3-5 year mortgages are coming up for renewal, and they will be massively underwater.

Good thing "it's different here" (TM).

Like sand through the hourglass...

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Bonus Friday Post: Overdose - The Next Financial Crisis

An excellent 46 minute video produced in Sweden explaining the development of the housing bubble from the ashes of the dotcom burst and terrorist attacks in 2001, the 2008 financial crisis and the evolving stimulus bubble.

I highly encourage everyone to watch it. 2010 is to 2008 as 1931 was to 1929. If you know your history, the market's recovered over 60% after the 1929 crash (which was induced by a massive credit bubble). Events are playing out as they did back then. There was another big crash later in the thirties and the stock market ended down 89% from the October 1929 highs.

"When we tell people there is going to be a bailout bubble, and they see the equity markets up 50 to 60%, they don't wanna believe it's another bubble. They want to step right back to that table and throw their dice and try to win their hand at the wheel of fortune that wall street is spinning. So people still don't want to believe that the worse is yet to come. It's easy to think of these predictions as much too gloomy. But that's exactly what people said the last time when these experts predicted the 2008 financial crisis."

Watch the first five minutes... you will watch it all.

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August 2010 stats

Well, the August sales numbers for real estate are now coming out.

The benchmark price, an average for typical homes sold, was down almost 3% in Metro Vancouver to $576,597 compared to the peak $593,419 which was hit in April.

In the Fraser Valley, the benchmark price for a typical detached home dipped almost 2% to $510,107 in August compared with $520,423 in April.

As we mentioned yesterday, the exception to all of this were the statistics for the west side of Vancouver where prices rose last month.

And while that bit of new is a silver lining, the stats are bad news and it marks the third consecutive gloomy month.

Look for fall the be battle royale against this developing trend.

Bank of Montreal is leading the assault to overturn this looming tide. BMO has chopped its benchmark five-year mortgage rate to 3.59%, down from 3.79%, making it one of the lowest five-year rates ever offered by a Canadian bank.

Trumpeting the news is Martin Nel, a senior BMO official, who said “It’s a great time to buy a home,” in a news release announcing the change. He added that people who take advantage of the offer will benefit and went on to stress, “if ever there was a time to buy, it is now.”

You can almost sense the desperate undertone. Listings are up, sales are down and prices are starting to slip.

In the industry this is called 'downward pressure' and it's not hard to see what will be coming this fall to counteract this.

Watch for a plethora of news items trumpeting the fact mortgage rates coming down to their lowest points ever and that low mortgage rates and lower housing prices mean that prices will be shooting up again soon.

You know the drill: Buy now... or be priced out forever.

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Do I sense a divergence in the correction?

Later this week the sales totals will come out for the month of August and they will continue a trend that has defined the past three months.

The summer months of 2010 have been marked by a dramatic decline in sales, building inventory and price reductions galore. And bearish market watches sit poised to gleefully herald the long anticipated market correction.

But while August stats will be ample fodder for this outcome, the month's statistics also contain a foul element for the bearish community.

Back in springtime the average price of a detached house price in Vancouver broke through the $1,000,000 mark. And while it declined to $941,275 in July, the August figure has jumped back up to $999,407.

How can this be?

As record low individual sales are broken down, I suspect we will see more westside homes like this one profiled in the Vancouver Sun.

A prime example of some of the bizarre sales of high end homes, this 4-bedroom, 5-bathroom 2,462 sq. ft home (with a measly 33 ft frontage) located at 4036 West 19th Aven. was assessed by B.C. Assessment in July 2010 at $1.508 million.

That, however, was 'assessed' value. The owner listed the house way over assessed value and asked $2.388 million

After 9 days on the market it sold for $2.39 million.

And that has been the hallmark of the Vancouver market and one of the surest signs we in are a massive bubble: when people massively overpay for an asset.

Those conditions are clearly at play now. And even with a dramatic reduction in sales, those houses that are selling are exchanging hands at values dramatically higher than assessments.

The end result is that the average price rises despite the dearth of sales, such are the ridiculous asking prices currently being trotted out by speculators and long time owners alike.

Even this house, which sold below asking price, sold at a ridiculous price.

Located at 3946 West 30th Ave. in Vancouver, the house was purchased in 1981 for $195,000.

This summer it was listed with an asking price of $2,188,000. After 51 days ti sold for $2,050,000.

Thus is the state of the Vancouver Real Estate market, North America's most bubbly real estate market.

The R/E cheerleaders will point to this sales as an example of why it's different here... hallmarks of Vancouver's resiliency.

History is replete with stories of excess at the end of boom times. And the Village of the Rainforest is no different from those tales.

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Sweet Justice?

The start of a new month and the chatter on the local real estate boards is about another month of collapsing sales.

One contributor to the VCI comments section notes that the market for condos in Vancouver-West have all but crashed. Vancouver-West includes all the condos in the downtown core.

As we noted at end of July the local market research firm, MPC Intelligence Inc., counted 6,659 condo units being put into the marketing phase between March 1 and July 1, 2010. This compares with just 1,937 that were on the market in 2009 and 5,066 in 2008.

So have have sales of new condos performed in August?

The worst August in the last 15 years was 2008 in which only 24 new condos sold. Previous to that the worst year was 1994 with 32 sales.

2010?

As of August 30th only 16 new condos had sold! A stunning new low is about to be set.

Another contributor to the comments section makes a hobby of tracking townhouses in Coal Harbour and False Creek North (waterfront townhouses).

A particularly keen observer, he keeps track of the total time a property has been on the market, even when it is re-listed with a new agent.

He advises that the average number of days listed for all townhouses in this area is a stunning 358 days on the market.

He also advises that the worst performing property has been on the market now for an astonishing 927 days.

927 days!

The property is 1439 Howe Street.

And our intrepid source also provides us with the history of this unit. It has has never been lived in since being built at the end of 2007. From the listing:

"GORGEOUS NEW TOWNHOME AT the award winning POMARIA, a concrete building, which is LEED certified and has received the UDI award for the best highrise in 2007. Unique 3 storey, 2 bedroom and den with its own private entrance, 200sq.ft rooftop deck with outdoor fireplace, barbeque hookup. Geothermal heating and cooling Loft style, double height ceilings on main floor, floor to ceiling windows, Luxurious interior with spa style bathrooms, and gourmet kitchen, GREAT BUILDING with the convenience of a 24 hour concierge, health spa, gym, steam room & guest suite."

The property was Initially listed on February 11 2008. Asking price: $989,000

On March 4 2008 the price was reduced to: $969,000
On April 17 2008 the price was reduced again to: $899.000
The property was re-listed on July 31 2008 for: $799,000
Then, on July 21 2009, it was relisted again for: $699,000

The market, as you all know, then started to reflate. Rather than move the property, the condo was re-listed June 10 2010 with the price jacked back up to: $759,000.

On June 24 2010 that asking price was reduced again to: $749,000.

Do you weep for the trials and tribulations of this seller? Our diligent VCI observer notes that the unfornate owner has already paid $20,000 in maintenance fees alone with no rent on a place he has never lived in.

Perhaps it is sweet justice, but another contributor to VCI provides further information.

The property was purchased on February 4th, 2008 for $749,900.

That means our poor, languishing owner turned around and re-listed his $749,900 condo with pie-in-the-sky dreams of flipping it for a quarter-million dollar profit.

Now... it languishes with an asking price of $749,000a and $20,000 in maintenance fees having been paid and two years of property taxes... a significant loss.

The silver lining? The VCI contributor reveals that the owner will save a fortune on commissions.

The owner is the listing real estate agent.

Ya gotta love it.

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Disaster-in-waiting?

As noted yesterday, British Columbia's R/E pumper-in-chief (Cameron Muir of the British Columbia Real Estate Association) came out on the weekend with this OpEd piece in Vancouver's two daily papers calling on R/E naysayers to 'get real'.

Muir likes to insist that the real estate landscape is doing fine, thank you very much, and is fully supported and justified.

Seems the Canadian Centre for Policy Alternatives (CCPA) failed to pick up their copy of the weekend paper.

In a study they released today the CCPA finds that for the first time in 30 years, six of Canada's hottest real estate markets are in a simultaneous housing bubble. Canada’s Housing Bubble: An Accident Waiting to Happen examines trends in house prices in Toronto, Vancouver, Calgary, Edmonton, Montreal and Ottawa between 1980 - 2010 and finds price increases in those cities are "outside of a historic comfort level."

In the past 30 years, while all six major cities have never been in a simultaneous bubble, the report notes that Canada's housing market has undergone three bubbles in individual cities.

The report defines the existance of a bubble when housing prices increase more rapidly than inflation, household incomes and economic growth.

In each of those previous individual bubble situations, the bubble was punctured by only a 1% rise in interest rates over two years (those individual situations occurred in Vancouver in 1981 and 1994 and Toronto in 1989).

Think about that for a second... 1%.

David Macdonald, the research associate who authored the report, sounds the alarm bells and not only declares that the Canadian housing market has entered bubble conditions, but that it would take only a 1% to 1.25% mortgage rate increase by Canada's big banks to cause a housing crash similar to the one the U.S. is grappling with.

(And they call me a bear!)

In Canada's other major markets — Calgary, Edmonton, Ottawa, and Montreal — prices remained stable from 1980 to 2001 at around $150,000 to $220,000 in today's dollars.

But since 2001?

"The concern today is all six major markets, not just Vancouver and Toronto, are out of that comfort zone," Macdonald said. "All six major markets now have an average price of over $300,000."

The report, naturally, zeros in on factors that have been discussed here over and over again. Canadian homes remain affordable because mortgage rates sit at record lows, but home affordability will change rapidly if rates return even partway to their historic norms. If that happens, young families who have over-extended themselves and seniors relying on selling their house for retirement income will be tremendously affected.

The title of the CfCPA report says that Canada's housing market is an accident waiting to happen.

I would could it a 'disaster-in-waiting', myself.

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