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Tuesday, August 31, 2010

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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Monday, August 30, 2010

Dog Days of Summer

As we travel through the dog days of summer, the real estate debate is entering an interesting stage.

Real estate sales have dropped off dramatically. August will be the third consecutive month where sales totals are among the lowest in over a decade. In the case of August 2010, sales will probably be the second or third lowest in the last 15 years.

But sales totals are merely a signpost. The real measure of the market is value. Is the market collapsing in value?

So far there are minor reductions. So far others have not followed the lead of Bob Rennie with 40% reductions in asking price.

In the great bull/bear debate, the doomsayers have long called for a massive correction on par with what has been witnessed in most of the rest of the western world. My own belief is a minimum correction of 40% for houses and 50% for condos, with a correction on the line of 60/70 far more likely. But that correction won't be as immediate or as dramatic as we have seen in many places in the United States.

And the comparative slo-motion unfolding our bubble saga is making R/E watching very interesting.

Mainstream media is starting to pick up on the story which has the effect of reinforcing that there is a potential downturn ahead. The end result: crucial buyer confidence evaporates.

The R/E machine has tried trotting out the P/R fluff articles which promote the 'buying opportunities' in the market. But the campaign has failed miserably. Sales continue to crater.

The dearth in sales has started to create some panic amongst realtors. A commission based professions, no sales mean no income. As we mentioned earlier this month, a colleague's condo sale only completed because both agents (representing the buyer and the seller) agreed to take a 50% reduction in their commissions. But even this drastic move is not enough and it appears there is genuine concern with some Realtors.

Around the blogosphere, significant attention has been paid to this BC realtor who posted a letter he sent to his MP on his facebook page.

In an attempt to lobby against the recent change in mortgage qualifying regulations, the Realtor notes that the market in his area is "completely dead. I have 140+ listings from new houses at $140,000 in Port Renfrew (even though it is Port Renfrew, I should be getting 100's of calls across Canada to find out where Renfrew is. Nothing). Brand new houses in Sooke, down to $299,900 from $399,900, no calls. The market has dried up all due to financing... Last month there were 300 home sales on the Lower Vancouver Island with 4700+ listings. One of the worst ratios ever."

Our Realtor friend can also see the writing on the wall for the future. Stagnating sales will lead to a severe reduction in prices and when that comes - lookout.

"I talked to 7-10 mortgage brokers and many agents while I was at the Victoria Real Estate Board golf tournament and everyone is scared. Hundreds of foreclosures coming, about 75% of the home owners could not qualify to buy their own houses (especially with suite). So what happens when their term of mortgage is up and the banks need them to re qualify? They are doomed."

Of course this sort of panic doesn't to much to inspire that all important buyer confidence. If realtors are laying out a scenario of collapsing prices and looming foreclosures, why buy?

This prompted head R/E cheerleader, Cameron Muir of the British Columbia Real Estate Association, to come out with this OpEd piece in Vancouver's two daily papers on the weekend.

Dismissing the concerns, Muir admonishes all the naysayers to "get real". Muir stresses we merely need to wait for the world economy to recover. In the meantime he hits on all the stereotypes that so many cling to in the Vancouver market. BC's population in growing (they will buy keeping demand high), the largest component of that population growth is immigration from wealthy foreigners - particularly from China (they can afford the high prices), and the worldwide downturn hasn't hit our real estate values yet so West Coast households are on relatively solid financial footings.

In other words, it's different here so don't worry.

But will our preferred destination status by wealthy migrants underpin the housing market and keep it inflated at levels that make Vancouver the most unaffordable city in North America for the people who live here?

Can a steady stream of the world's wealthy come in fast enough to replace those who live here as homeowners?

Because if sales stall and prices begin to fall, that 'solid financial foothold' will crumble like a dry cookie.

As we have already noted, this scenario will almost certainly play out when interest rates rise again. When they do, our market is going to be crushed.

But even without the rise in interest rates, our market has stalled (stats for the month will show prices are starting to fall). As our realtor friend on facebook noted, the current mortgage regulations already have a significant number of current homeowners in a bind. Their mortgages only work if calculations permit suite income.

People who live here simply can't carry their home mortgage on their own.

Thus, even with the lowest five year mortgage rates in history, the market stagnates because buyers aren't entering the market.

Meanwhile sellers, believing we will see a repeat of 2008 where financial stimulus resuscitated the market back into a buying frenzy after a 10% correction, wait and refuse to lower their selling prices significantly.

Will the market rebound in the fall? Or will the dog days of August stretch into winter and spring?

I suspect that September will drag on in the same manner as June, July and August with buyers and sellers maintaining their current viewpoints and prices continuing their slow descent.click here to listen to Laurel (magri) Archer talk about working as an escort/prostitute.
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Saturday, August 28, 2010

A glass half full.

I get a lot of grief from my colleagues where I work. They think I'm all negative and pessimistic.

Naturally I disagree.

Take for instance my reprinting of another blogger's take on how hyperinflation will play out that was posted on Tuesday.

It was not well received. 'Gloom and Doom' was the way it was perceived.

Gonzola Lira has posted a follow up and, if you are interested, you can see it here.

I won't repost all of his article, but I will focus on this part:

  • "I’m not repeating this insight as an empty comfort to my readers — I’m saying it as a trading strategy. When things are at their crazy worst, when everyone believes the Apocalypse is well nigh here, that’s when thing are about to turn for the better. This applies to every situation — including and most especially in a hyperinflationary situation... So if the currency goes up in flames in a hyperinflationary fire, of course there will be a period of terrifying instability — but it will pass. Either the currency will be repaired somehow (as Volcker repaired the dollar back in 1980–’82). Or the currency will be completely and irrevocably trashed —and then be replaced by something else. Because—to insist—people need a stable medium of exchange.

    If Treasuries tank and commodities shoot up so high that they essentially break the dollar, civilization will not come crashing down into anarchy. At worst, there’ll be a three-four years of hell—economic hell. Financial hell. But then things will settle down into a new normal...

    What I do know is (1) a hyperinflationary event will happen, following the crash in Treasuries. (2)commodities will be the go-to medium for value storage. (3) all asset classes will collapse in short order. And (4) and most importantly — civil society will not collapse along with the dollar. Civil society will stumble about like a drunken sailor, but eventually right itself and carry on with a new normal.

    During that stumble, opportunities will present themselves. I hope I have explained why."

Yes, opportunities.

Whether it be the looming real estate crash, or the inevitable economic fallout from the massive amount of debt being built up in other areas of our economy, it isn't doom and gloom... it's all about opportunities.

Peering presciently across what (for some) are the gossamer waves of time and recognizing the obvious conditions of the real estate bubble is not about preaching doom and gloom.

It's about seeing beforehand what will soon be obvious to all and positioning yourself to take advantage of it.

Pessimistic or opportunistic?

I guess it depends on your point of view.

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Friday, August 27, 2010

Oblivious

The most striking thing about real estate in the Village on the Edge of the Rainforest right now is just how oblivious everyone is to what is going on in the United States.

On Tuesday, a report said that sales of existing homes in the USA plunged 27.2% in July to the lowest rate since the National Association of Realtors began counting in 1999.

Confidence in real estate in the United States has evapourated. As a result, so have sales.

Nothing seems to be able to change that. The interest rates for 30 year mortgages are at historic lows. Generous tax breaks abound. Goverment subisdies ($8,000 gifts just to buy) aren't working.

Real Estate continues to plunge.

And perhaps the most damning statistic to come out is the fact that sales of expensive homes in America have completely evaporated.

Guess how many homes priced above $750,000 managed to sell in July?

Answer — zero. That's right... zero.

And that's been the case for the second month in a row.

In the Village on the Edge of the Rainforest, the month of August is coming to a close and real estate sales are on pace to tank for a third consecutive month. August 2010 will be the 2nd worst August in the last 15 years.

Confidence is evaporating. People are starting to understand.

And this is all happening despite a 5 year mortgage rate that has dropped even lower the past month.

I have always maintained that we will see a correction of a minimum of 40% for houses and 50% for condos. I suspect the reality will be more like 60/70 or more.

Popular opinion is that the market will rebound in October in the same fashion that it bounced back last time.

Baring the introduction of American-style 30 year fixed mortgage rates at levels similar to the current 5 year rates, I don't see any rebound happening.

We shall see.

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Thursday, August 26, 2010

Pestov: Summer Update

Back in March, Alec Pestov came out with an in-depth analysis of the Canadian housing market. The original paper explored the subject of a possible housing bubble in Canada and examined a diverse array of factors that may have contributed to the rise in house prices.

Pestov concluded that market fundamentals had become insignificant in affecting house prices, and that price-momentum conditions characteristic of a bubble now exist. Pestov proposed that the extreme decoupling of the market prices from the underlying fundamentals suggested a correction in housing prices in Canada was coming.

Pestov has just completed the follow up to his original report.

Quoting Pestov, "This second edition of the report is the first of the semi-annual sequels for the original paper to provide timely updates on the state of the housing market in Canada. This document introduces a structure of the semi-annual releases, and your comments and suggestions regarding it are always welcome."

You can read the latest report here.

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Tuesday, August 24, 2010

Can you have hyperinflation while defaltion takes hold?

In my little stint of bumming people out with this blog, I am constantly told that I am a negative doomsayer.

Shortly after being reminded of that, I am often asked what I perceive is the worst case scenario for what looms for real estate and the economy. Go figure.

(I guess it's like one of them bad accidents on the highway where every single person slows down to make sure they get a good look at the carnage).

If I am pressed, I usually answer the question in a word: FEAR.

The way western governments have responded to the crisis is of tremendous concern. And the worst case scenario would see the Law of Unintended Consequences kick in. And the catalyst trigger will be fear.

I continue to maintain the we still do not fully appreciate the depth and the breadth of the financial earthquake that shook the world in 2008 or of the repercussions that still emanate from it.

The fallout is causing some people to loose confidence - in government and in fiat currencies.

And while it is all fine and dandy to say that people are irrational to be buying gold, the fact of the matter is that markets can often be driven by irrationality. By fear.

Yesterday I came across this speculative post on Quantitative Easing and Hyperinflation by Gonzalo Lira.

I do not agree with all of it, but if offers a very well laid out sequence of events detailing how a dollar crisis could be triggered.

I think it is well written and worth reading even if you don't agree with it.

I hope you will indulge me and find it worth your time.

How Hyperinflation Will Happen

Right now, we are in the middle of deflation. The Global Depression we are experiencing has squeezed both aggregate demand levels and aggregate asset prices as never before. Since the credit crunch of September 2008, the U.S. and world economies have been slowly circling the deflationary drain.

To counter this, the U.S. government has been running massive deficits, as it seeks to prop up aggregate demand levels by way of fiscal “stimulus” spending—the classic Keynesian move, the same old prescription since donkey’s ears.

But the stimulus, apart from being slow and inefficient, has simply not been enough to offset the fall in consumer spending.

For its part, the Federal Reserve has been busy propping up all assets—including Treasuries—by way of “quantitative easing”.

The Fed is terrified of the U.S. economy falling into a deflationary death-spiral: Lack of liquidity, leading to lower prices, leading to unemployment, leading to lower consumption, leading to still lower prices, the entire economy grinding down to a halt. So the Fed has bought up assets of all kinds, in order to inject liquidity into the system, and bouy asset price levels so as to prevent this deflationary deep-freeze—and will continue to do so. After all, when your only tool is a hammer, every problem looks like a nail.

But this Fed policy—call it “money-printing”, call it “liquidity injections”, call it “asset price stabilization”—has been overwhelmed by the credit contraction. Just as the Federal government has been unable to fill in the fall in aggregate demand by way of stimulus, the Fed has expanded its balance sheet from some $900 billion in the Fall of ’08, to about $2.3 trillion today—but that additional $1.4 trillion has been no match for the loss of credit. At best, the Fed has been able to alleviate the worst effects of the deflation—it certainly has not turned the deflationary environment into anything resembling inflation.

Yields are low, unemployment up, CPI numbers are down (and under some metrics, negative)—in short, everything screams “deflation”.

Therefore, the notion of talking about hyperinflation now, in this current macro-economic environment, would seem . . . well . . . crazy. Right?

Wrong: I would argue that the next step down in this world-historical Global Depression which we are experiencing will be hyperinflation.

Most people dismiss the very notion of hyperinflation occurring in the United States as something only tin-foil hatters, gold-bugs, and Right-wing survivalists drool about. In fact, most sensible people don’t even bother arguing the issue at all—everyone knows that only fools bother arguing with a bigger fool.

A minority, though—and God bless ’em—actually do go ahead and go through the motions of talking to the crazies ranting about hyperinflation. These amiable souls diligently point out that in a deflationary environment—where commodity prices are more or less stable, there are downward pressures on wages, asset prices are falling, and credit markets are shrinking—inflation is impossible. Therefore, hyperinflation is even more impossible.

This outlook seems sensible—if we fall for the trap of thinking that hyperinflation is an extention of inflation. If we think that hyperinflation is simply inflation on steroids—inflation-plus—inflation with balls—then it would seem to be the case that, in our current deflationary economic environment, hyperinflation is not simply a long way off, but flat-out ridiculous.

But hyperinflation is not an extension or amplification of inflation. Inflation and hyperinflation are two very distinct animals. They look the same—because in both cases, the currency loses its purchasing power—but they are not the same.

Inflation is when the economy overheats: It’s when an economy’s consumables (labor and commodities) are so in-demand because of economic growth, coupled with an expansionist credit environment, that the consumables rise in price. This forces all goods and services to rise in price as well, so that producers can keep up with costs. It is essentially a demand-driven phenomena.

Hyperinflation is the loss of faith in the currency. Prices rise in a hyperinflationary environment just like in an inflationary environment, but they rise not because people want more money for their labor or for commodities, but because people are trying to get out of the currency. It’s not that they want more money—they want less of the currency: So they will pay anything for a good which is not the currency.

Right now, the U.S. government is indebted to about 100% of GDP, with a yearly fiscal deficit of about 10% of GDP, and no end in sight. For its part, the Federal Reserve is purchasing Treasuries, in order to finance the fiscal shortfall, both directly (the recently unveiled QE-lite) and indirectly (through the Too Big To Fail banks). The Fed is satisfying two objectives: One, supporting the government in its efforts to maintain aggregate demand levels, and two, supporting asset prices, and thereby prevent further deflationary erosion. The Fed is calculating that either path—increase in aggregate demand levels or increase in aggregate asset values—leads to the same thing: A recovery in the economy.

This recovery is not going to happen—that’s the news we’ve been getting as of late. Amid all this hopeful talk about “avoiding a double-dip”, it turns out that we didn’t avoid a double-dip—we never really managed to claw our way out of the first dip. No matter all the stimulus, no matter all the alphabet-soup liquidity windows over the past 2 years, the inescapable fact is that the economy has been—and is headed—down.

But both the Federal government and the Federal Reserve are hell-bent on using the same old tired tools to “fix the economy”—stimulus on the one hand, liquidity injections on the other.

It’s those very fixes that are pulling us closer to the edge. Why? Because the economy is in no better shape than it was in September 2008—and both the Federal Reserve and the Federal government have shot their wad. They got nothin’ left, after trillions in stimulus and trillions more in balance sheet expansion - but they have accomplished one thing: They have undermined Treasuries. These policies have turned Treasuries into the spit-and-baling wire of the U.S. financial system—they are literally the only things holding the whole economy together.

In other words, Treasuries are now the New and Improved Toxic Asset. Everyone knows that they are overvalued, everyone knows their yields are absurd—yet everyone tiptoes around that truth as delicately as if it were a bomb. Which is actually what it is.

So this is how hyperinflation will happen:

One day—when nothing much is going on in the markets, but general nervousness is running like a low-grade fever (as has been the case for a while now)—there will be a commodities burp: A slight but sudden rise in the price of a necessary commodity, such as oil.

This will jiggle Treasury yields, as asset managers will reduce their Treasury allocations, and go into the pressured commodity, in order to catch a profit. (Actually it won’t even be the asset managers—it will be their programmed trades.) These asset managers will sell Treasuries because, effectively, it’s become the principal asset they have to sell.

It won’t be the volume of the sell-off that will pique Bernanke and the drones at the Fed—it will be the timing. It’ll happen right before a largish Treasury auction. So Bernanke and the Fed will buy Treasuries, in an effort to counteract the sell-off and maintain low yields—they want to maintain low yields in order to discourage deflation. But they’ll also want to keep the Treasury cheaply funded. QE-lite has already set the stage for direct Fed buys of Treasuries. The world didn’t end. So the Fed will feel confident as it moves forward and nips this Treasury yield jiggle in the bud.

The Fed’s buying of Treasuries will occur in such a way that it will encourage asset managers to dump even more Treasuries into the Fed’s waiting arms. This dumping of Treasuries won’t be out of fear, at least not initially. Most likely, in the first 15 minutes or so of this event, the sell-off in Treasuries will be orderly, and carried out with the idea (at the time) of picking up those selfsame Treasuries a bit cheaper down the line.

However, the Fed will interpret this sell-off as a run on Treasuries. The Fed is already attuned to the bond markets’ fear that there’s a “Treasury bubble”. So the Fed will open its liquidity windows, and buy up every Treasury in sight, precisely so as to maintain “asset price stability” and “calm the markets”.

The Too Big To Fail banks will play a crucial part in this game. See, the problem with the American Zombies is, they weren’t nationalized. They got the best bits of nationalization—total liquidity, suspension of accounting and regulatory rules—but they still get to act under their own volition, and in their own best interest. Hence their obscene bonuses, paid out in the teeth of their practical bankruptcy. Hence their lack of lending into the weakened economy. Hence their hoarding of bailout monies, and predatory business practices. They’ve understood that, to get that sweet bail-out money (and those yummy bonuses), they have had to play the Fed’s game and buy up Treasuries, and thereby help disguise the monetization of the fiscal debt that has been going on since the Fed began purchasing the toxic assets from their balance sheets in 2008.

But they don’t have to do what the Fed tells them, much less what the Treasury tells them. Since they weren’t really nationalized, they’re not under anyone’s thumb. They can do as they please—and they have boatloads of Treasuries on their balance sheets.

So the TBTF banks, on seeing this run on Treasuries, will add to the panic by acting in their own best interests: They will be among the first to step off Treasuries. They will be the bleeding edge of the wave.

Here the panic phase of the event begins: Asset managers—on seeing this massive Fed buy of Treasuries, and the American Zombies selling Treasuries, all of this happening within days of a largish Treasury auction—will dump their own Treasuries en masse. They will be aware how precarious the U.S. economy is, how over-indebted the government is, how U.S. Treasuries look a lot like Greek debt. They’re not stupid: Everyone is aware of the idea of a “Treasury bubble” making the rounds. A lot of people—myself included—think that the Fed, the Treasury and the American Zombies are colluding in a triangular trade in Treasury bonds, carrying out a de facto Stealth Monetization: The Treasury issues the debt to finance fiscal spending, the TBTF banks buy them, with money provided to them by the Fed.

Whether it’s true or not is actually beside the point—there is the widespread perception that that is what’s going on. In a panic, widespread perception is your trading strategy.

So when the Fed begins buying Treasuries full-blast to prop up their prices, these asset managers will all decide, “Time to get out of Dodge—now.”

Note how it will not be China or Japan who all of a sudden decide to get out of Treasuries—those two countries will actually be left holding the bag. Rather, it will be American and (depending on the time of day when the event happens) European asset managers who get out of Treasuries first. It will be a flash panic—much like the flash-crash of last May. The events I describe above will happen in a very short span of time—less than an hour, probably. But unlike the event in May, there will be no rebound.

Notice, too, that Treasuries will maintain their yields in the face of this sell-off, at least initially. Why? Because the Fed, so determined to maintain “price stability”, will at first prevent yields from widening—which is precisely why so many will decide to sell into the panic: The Bernanke Backstop won’t soothe the markets—rather, it will make it too tempting not to sell.

The first of the asset managers or TBTF banks who are out of Treasuries will look for a place to park their cash—obviously. Where will all this ready cash go?

Commodities.

By the end of that terrible day, commodites of all stripes—precious and industrial metals, oil, foodstuffs—will shoot the moon. But it will not be because ordinary citizens have lost faith in the dollar (that will happen in the days and weeks ahead)—it will happen because once Treasuries are not the sure store of value, where are all those money managers supposed to stick all these dollars? In a big old vault? Under the mattress? In euros?

Commodities: At the time of the panic, commodities will be perceived as the only sure store of value, if Treasuries are suddenly anathema to the market—just as Treasuries were perceived as the only sure store of value, once so many of the MBS’s and CMBS’s went sour in 2007 and 2008.

It won’t be commodity ETF’s, or derivatives—those will be dismissed (rightfully) as being even less safe than Treasuries. Unlike before the Fall of ’08, this go-around, people will pay attention to counterparty risk. So the run on commodities will be for actual, feel-it-’cause-it’s-there commodities. By the end of the day of this panic, commodities will have risen between 50% and 100%. By week’s end, we’re talking 150% to 250%. (My private guess is gold will be finessed, but silver will shoot up the most—to $100 an ounce within the week.)

Of course, once commodities start to balloon, that’s when ordinary citizens will get their first taste of hyperinflation. They’ll see it at the gas pumps.

If oil spikes from $74 to $150 in a day, and then to $300 in a matter of a week—perfectly possible, in the midst of a panic—the gallon of gasoline will go to, what: $10? $15? $20?

So what happens then? People—regular Main Street people—will be crazy to buy up commodities (heating oil, food, gasoline, whatever) and buy them now while they are still more-or-less affordable, rather than later, when that $15 gallon of gas shoots to $30 per gallon.

If everyone decides at roughly the same time to exchange one good—currency—for another good—commodities—what happens to the relative price of one and the relative value of the other? Easy: One soars, the other collapses.

When people freak out and begin panic-buying basic commodities, their ordinary financial assets—equities, bonds, etc.—will collapse: Everyone will be rushing to get cash, so as to turn around and buy commodities.

So immediately after the Treasury markets tank, equities will fall catastrophically, probably within the next few days following the Treasury panic. This collapse in equity prices will bring an equivalent burst in commodity prices—the second leg up, if you will.

This sell-off of assets in pursuit of commodities will be self-reinforcing: There won’t be anything to stop it. As it spills over into the everyday economy, regular people will panic and start unloading hard assets—durable goods, cars and trucks, houses—in order to get commodities, principally heating oil, gas and foodstuffs. In other words, real-world assets will not appreciate or even hold their value, when the hyperinflation comes.

This is something hyperinflationist-skeptics never quite seem to grasp: In hyperinflation, asset prices don’t skyrocket—they collapse, both nominally and in relation to consumable commodities. A $300,000 house falls to $60,000 or less, or better yet, 50 ounces of silver—because in a hyperinflationist episode, a house is worthless, whereas 50 bits of silver can actually buy you stuff you might need.

Right now, I’m guessing that sensible people who’ve read this far are dismissing me as being full of shit—or at least victim of my own imagination. These sensible people, if they deign to engage in the scenario I’ve outlined above, will argue that the government—be it the Fed or the Treasury or a combination thereof—will find a way to stem the panic in Treasuries (if there ever is one), and put a stop to hyperinflation (if such a foolish and outlandish notion ever came to pass in America).

Uh-huh: So the Government will save us, is that it? Okay, so then my question is, How?

Let’s take the Fed: How could they stop a run on Treasuries? Answer: They can’t. See, the Fed has already been shoring up Treasuries—that was their strategy in 2008—’09: Buy up toxic assets from the TBTF banks, and have them turn around and buy Treasuries instead, all the while carefully monitoring Treasuries for signs of weakness. If Treasuries now turn toxic, what’s the Fed supposed to do? Bernanke long ago ran out of ammo: He’s just waving an empty gun around. If there’s a run on Treasuries, and he starts buying them to prop them up, it’ll only give incentive to other Treasury holders to get out now while the getting’s still good. If everyone decides to get out of Treasuries, then Bernanke and the Fed can do absolutely nothing effective. They’re at the mercy of events—in fact, they have been for quite a while already. They just haven’t realized it.

Well if the Fed can’t stop this, how about the Federal government—surely they can stop this, right?

In a word, no. They certainly lack the means to prevent a run on Treasuries. And as to hyperinflation, what exactly would the Federal government do to stop it? Implement price controls? That will only give rise to a rampant black market. Put soldiers out on the street? America is too big. Squirt out more “stimulus”? Sure, pump even more currency into a rapidly hyperinflating everyday economy—right . . .

(BTW, I actually think that this last option is something the Federal government might be foolish enough to try. Some moron like Palin or Biden might well advocate this idea of helter-skelter money-printing so as to “help all hard-working Americans”. And if they carried it out, this would bring us American-made images of people using bundles of dollars to feed their chimneys. I actually don’t think that politicians are so stupid as to actually start printing money to “fight rising prices”—but hey, when it comes to stupidity, you never know how far they can go.)

In fact, the only way the Federal government might be able to ameliorate the situation is if it decided to seize control of major supermarkets and gas stations, and hand out cupon cards of some sort, for basic staples—in other words, food rationing. This might prevent riots and protect the poor, the infirm and the old—it certainly won’t change the underlying problem, which will be hyperinflation.

“This is all bloody ridiculous,” I can practically hear the hyperinflation skeptics fume. “We’re just going through what the Japanese experienced: Just like the U.S., they went into massive government stimulus—hell, they invented quantitative easing—and look what’s happened to them: Stagnation, yes—hyperinflation, no.”

That’s right: The parallels with Japan are remarkably similar—except for one key difference. Japanese sovereign debt is infinitely more stable than America’s, because in Japan, the people are savers—they own the Japanese debt. In America, the people are broke, and the Nervous Nelly banks own the debt. That’s why Japanese sovereign debt is solid, whereas American Treasuries are soap-bubble-fragile.

That’s why I think there’ll be hyperinflation in America—that bubble’s soon to pop. I’m guessing if it doesn’t happen this fall, it’ll happen next fall, without question before the end of 2011.

The question for us now—ad portas to this hyperinflationary event—is, what to do?

Neanderthal survivalists spend all their time thinking about post-Apocalypse America. The real trick, however, is to prepare for after the end of the Apocalypse.

The first thing to realize, of course, is that hyperinflation might well happen—but it will end. It won’t be a never-ending situation—America won’t end up like in some post-Apocalyptic, Mad Max: Beyond Thuderdome industrial wasteland/playground. Admittedly, that would be cool, but it’s not gonna happen—that’s just survivalist daydreams.

Instead, after a spell of hyperinflation, America will end up pretty much like it is today—only with a bad hangover. Actually, a hyperinflationist spell might be a good thing: It would finally clean out all the bad debts in the economy, the crap that the Fed and the Federal government refused to clean out when they had the chance in 2007–’09. It would break down and reset asset prices to more realistic levels—no more $12 million one-bedroom co-ops on the UES. And all in all, a hyperinflationist catastrophe might in the long run be better for the health of the U.S. economy and the morale of the American people, as opposed to a long drawn-out stagnation. Ask the Japanese if they would have preferred a couple-three really bad years, instead of Two Lost Decades, and the answer won’t be surprising. But I digress.

Like Rothschild said, “Buy when there’s blood on the streets.” The thing to do to prepare for hyperinflation would be to invest in a diversified hard-metal basket before the event—no equities, no ETF’s, no derivatives. If and when hyperinflation happens, and things get bad (and I mean really bad), take that hard-metal basket and—right in the teeth of the crisis—buy residential property, as well as equities in long-lasting industries; mining, pharma and chemicals especially, but no value-added companies, like tech, aerospace or industrials. The reason is, at the peak of hyperinflation, the most valuable assets will be dirt-cheap—especially equities—especially real estate.

I have no idea what will happen after we reach the point where $100 is no longer enough to buy a cup of coffee—but I do know that, after such a hyperinflationist period, there’ll be a “new dollar” or some such, with a few zeroes knocked off the old dollar, and things will slowly get back to a new normal. I have no idea the shape of that new normal. I wouldn’t be surprised if that new normal has a quasi or de facto dictatorship, and certainly some form of wage-and-price controls—I’d say it’s likely, but for now that’s not relevant.

What is relevant is, the current situation cannot long continue. The Global Depression we are in is being exacerbated by the very measures being used to fix it—stimulus is putting pressure on Treasuries, which are being shored up by the Fed. This obviously cannot have a happy ending. Therefore, the smart money prepares for what it believes is going to happen next.

I think we’re going to have hyperinflation. I hope I have managed to explain why.

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Monday, August 23, 2010

The Slow Melt will continue.

I get asked this all the time.

If the Bank of Canada is getting ready to regularly raise rates, doesn't that mean the economy is turning around and the worst has past?

No.

The problem is, the worst has not past.

And the reason is simple: debt. Massive amounts of debt.

The last 50 years have given rise to the biggest credit bubble in human history. And we are still in the early days of watching it collapse.

This is what many do not understand... or simply do not want to accept.

Our government tried to temporarily stave off the effects of this reckoning with the belief that buffering against the worldwide firestorm would allow us to bridge the gap to a world wide recovery.

But that recovery isn't materializing.

As David Rosenberg notes in today's Globe and Mail, we got a pause in initial phase of the 2008 collapse with a spectacular bear market rally in the final eight months of 2009 and early 2010. But we are now rolling back into a period of pronounced economic weakness, with contraction in gross domestic product likely to soon follow the stagnant economic conditions of the current quarter.

There is simply too much debt overhanging household balance sheets and the process of balance sheet repair is still in its infancy (particularly here in Canada).

"We are a long way off this deleveraging phase from running its course, both in magnitude and duration. If history is any guide, these transition periods to the next sustainable bull market and economic expansion typically last seven years."

Rosenberg observes that government has expended tremendous resources to cushion the blow but now we will see first hand what happens when policy stimulus and a mini-inventory cycle fade in a credit contraction: stagnation in the third quarter followed by renewed economic contraction in the fourth quarter.

We are in an extraordinary period of economic and financial history. We have seen an almost 80% rally in the stock market since the financial crisis. The last time that happened was in the early 1930s. That event was followed by gut-wrenching spasms to the downside.

With economic recovery not gaining traction in 2010, the parallels to 1930/31 are eerily similar.

For Vancouver real estate it means the slow melt will continue. With no worldwide economic recovery; there is nothing to drive a resurgence in real estate.

But, as mentioned yesterday, sellers are not prepared (by a long shot) to accept the changing realities of the market. Therefore we will see more and more listings pulled from the real estate market as those sellers (who have the financial means to do so) will attempt to outwait the stagnating market.

But less listings will not change the economic condition. Thus prices will continue to decline even with less listings out there.

Real estate this autumn will primarily showcase the four D's: death, debt, divorce and displacement. These are the forces which will push sellers to actually sell at market rates in the current stagnating climate.

And to entice buyers, sellers will have to cut asking prices.

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Sunday, August 22, 2010

Is it a buying opportunity?

The question sent a shiver down my spine for so many different reasons.

Coming out of the blue as it did from the little red-headed girl; it said so many different things on so many levels. I wasn't aware she was looking at real estate and the question spoke to a number of things going on behind the scenes in her life.

Of course she didn't tell me she was looking at real estate. But it's clear buttons are being pushed. 'Buying Opportunity' is one of those R/E coded catch-phrases and it was out of character.

I lament for those who may be drawn like moths to a flame believing that we may be on the cusp of such conditions.

We aren't.

While August is shaping up to be another horrendous month for sales (perhaps the second worst of the last 15 years), I do not believe we are going to see the dramatic drop in prices - those significant reductions so many yearn to see - for a while yet.

Last week I told you about a colleague who had been fortunate enough to sell his condo after only a couple of weeks on the market.

He was lucky... and he knows it. Nothing else has sold in his neighbourhood since.

So I asked the question: what would you have done if the property had languished on the market?

Bought 10 years ago for $300,000, he wasn't prepared to accept anything under $800,000 today. With no mortgage outstanding, I was curious if he would move on the price?

"Absolutely not. If we couldn't sell it at that price we were prepared to rent it until we got our price."

It's an attitude I suspect is prevalent. Seller's believe their property is 'worth' the record levels set by the market at the beginning of the year. With sales plummeting, listings are also starting to shrink as sellers take their properties off the market.

Having watched the market resuscitate in 2009/2010, I believe sellers will try and out wait what many see as a temporary downturn.

We are looking at a slow, painful autumn and winter as sellers dance with a slow market melt and wrestle with what will become a new market reality.

And acceptance is going to be a slow and difficult process.

As for conditions signalling a 'buying opportunity', house lust is a dangerous affliction. It blinds the afflicted to what they would normally be able to see.

And I fear the little red-headed girl is blind to a great many things at the moment.

I offered my two cents worth, but deep down I know house lust not only renders it's victims blind, but deaf as well. Not to mention how it becomes a lever for other subtle machinations.

All you can do is say your piece and offer your advice.

After that it's their choice.

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Thursday, August 19, 2010

Canadian Business Magazine on the Housing Bubble

As if to follow up on yesterdays post, Canadian Business Magazine hit the newsstands today hilighting the Canadian Housing Bubble.

And it's an excellent read.

The magazine hits all the key points we've been talking about for the last year and a half.

They zero in on the central causes of the massive rise in home values the last 10 years: the Canadian Mortgage Housing Corporation (CMHC).

Canadian Business Magazine (CBM) cuts right to the chase and points out how the federal government stoked the housing market for an extended period and that "Canadians should brace themselves accordingly for a more jarring correction in residential real estate."

Do tell?

CBM attempts to outline how CMHC played its "critical, if underappreciated, role."

As we noted yesterday, CMHC over the last decade has dramatically lowered its minimum qualifying standards for insuring mortgages. CMHC sets the bar for home ownership through those minimum qualifying standards.

Lowering standards for acceptance, insuring mortgages with no downpayment and increasing amortization periods from 25 to 40 years for that insurance had a profound effect on housing prices.

  • "If people were able to purchase houses with zero down, they were doing that," says Jerry Marriott, a managing director at bond-rating agency DBRS. "If people were able to purchase houses with longer amortizations and therefore have a lower monthly payment, they were doing that...That was partly what was supporting an increase in house prices."

CBM also notes the Bank of Canada's role:

  • "The Bank of Canada did its part. Officially, it sets the overnight rate (the short-term interest rate at which financial institutions lend among themselves) primarily to keep inflation in check. That rate stood at 5.75% a decade ago but has trended lower ever since. Interest rates are a powerful influence on consumer behavior: lowering them encourages citizens to borrow and spend, while raising them rewards savers and punishes debtors. The housing market is particularly sensitive to interest rates: they're critical in determining a mortgage's monthly carrying costs."

And like the naive car buyer who is lured into buying a new car based, not on what they can afford, but upon whether or not they can make the monthly payments... so too have millions of Canadians been hooked into buying houses based on a mortgages monthly carrying cost.

And in the process they set off a decade long bidding war for real estate.

It was a purposeful strategy by the federal government.

Between September 2008 and April 2009 the nation was spiralling down into the recession that was gripping the world. In an attempt to cushion Canadians from the recession, CBM notes that:

  • Ottawa electro-shocked the housing market. "There was this absolutely massive assault on the recession by focusing on the housing sector," says David Rosenberg, chief economist and strategist at Gluskin Sheff. "And probably that wasn't an unwise decision, when you consider all the powerful multiplier impacts it has on the rest of the economy." Housing-related spending — a broad category that includes not only home purchases but also furniture, appliances, renovations and a host of other items — accounts for one-fifth of all economic activity. Rosenberg says federal measures to stimulate housing markets accounts for 100% of Canada's economic recovery.

As we know, the government attacked the problem with two key tactics. First the Bank of Canada instituted rock-bottom interest rates (0.25%). RBC economist Robert Hogue called the resulting low mortgage rates "undoubtedly the rally's most powerful driver."

Next Ottawa authorized CMHC to buy up to $125 billion in mortgages from banks and other financial institutions under the Insured Mortgage Purchase Program (IMPP). We talked about this move here, and it lays waste to the myth that Canada never bailed out it's banks.

They did, big time.

  • The idea was to ensure lenders had a ready source of funding when traditional methods had been closed, which in turn allowed Canadians to keep borrowing. "This was a very good thing," says Tsur Somerville, an associate professor at the University of British Columbia's Sauder School of Business. "Financial system meltdown is a whole lot worse than governments taking on some additional mortgage-default risk."

These actions allowed credit to flow and gave the housing boom it's fuel to ignite a massive R/E bonfire. In Vancouver home prices have more than doubled since 2000.

More importantly, family incomes have not doubled.

  • The value of outstanding mortgages surged from $427 billion to nearly $930 billion during the same period, which helped catapult the average debt-to-income ratios of Canadians to 145%, just shy of current levels in the U.S. and Britain. The Bank of Canada is mildly concerned. "Household balance sheets are still a significant source of risk," it reasoned in its latest review of Canada's financial system, "since the rapid expansion of consumer and mortgage credit implies that a greater proportion of households are likely to become vulnerable to adverse income and wealth shocks as interest rates rise from their exceptionally low levels."

CBM notes that the unwinding of the powerful housing-market stimulus is already underway.

  • Ottawa terminated the IMPP on schedule in March. It has tightened CMHC's lending standards, albeit modestly. And the Bank of Canada began ratcheting up interest rates this year. Renewed government intervention cannot be ruled out, but it would be expensive and only delay the reckoning.

The magazine attempts to temper how bad the reckoning will be. They say that when Canada's correction arrives, it'll likely prove less traumatic than America's.

I disagree.

Canada's lenders generally have legal recourse to borrowers, meaning they can pursue a borrower's other assets in court in the event of foreclosure. That makes it more difficult to simply abandon a home that has become a financial albatross.

Many argue that this will keep Canadians from defaulting on their mortgages.

We will see.

I suspect that as values start to drop, the number of people who bought the maximum amount of house they could at emergency level rates will find that they are seriously underwater when mortgages come up for renewal.

Even if interest rates never rise, this will be problematic.

But bump interest rates up just a few percent, and I forsee enough Canadians being forced into foreclosure that it will cause a devastating domino effect - especially here in Vancouver.

I seem to be in the minority on this issue, even amongst R/E bears.

And I seriously fear what this could do to our country. As we noted yesterday, CMBC is on the hook for $770 Billion dollars in mortgages and only has $9 Billion in assets - a condition which CBC noted was "more leverage than any U.S. bank or lending institution ever had."

If CMBC has to pay out even only 10% of that $770 Billion, it would require a taxpayer bailout of $60 Billion.

It took our nation over 10 years, and the introduction of the GST to get rid of a then-record $40 Billion deficit a decade ago.

If the dominos fall as I worry they will... Canada will be in serious trouble.

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Wednesday, August 18, 2010

Denial

My favorite topic, the Canadian Mortgage and Housing Corporation (CMHC) is front and centre in the news again.

As stated numerous times before, the only reason our real estate market hasn't tanked like it has in the United States is because of the way our government intervened in the financial and real estate crisis of 2008/2009.

The feds slashed interest rates to dirt in order to stimulate the economy and then, to further stimulate the real estate market, changes were made to CMHC.

After the CMHC decided to remove the price ceiling limitations in 2003 (that is, it would insure any mortgage regardless of the cost of the home), the inflating of the housing bubble was ramped up in 2008.

At that time Canadian home prices had started to dip as affordability became the worst on record in many cities. That's when the CMHC publicly admitted that it was ordered by the Federal Government to approve as many high risk borrowers as possible to prop up the housing market and keep credit flowing.

As a result, in 2008, some 42% of all high risk applications were approved; a 33% increase over 2007. That trend continued through 2009 and 2010.

Incredibly, however, between the beginning of 2007 and 2009 Canadian Banks increased their total mortgage credit outstanding listed on their books by only 0.01% - possibly the smallest amount of change in post WWII history.

How can this be?

Because almost all of these mortgages were securitized by the CMHC; guaranteed by the Federal Government. As a result the Canadian mortgage securitizaton market grew from $100 billion in 2006 to $370 billion by the end of 2009.

These actions kept credit flowing to homebuyers in Canada while credit dried up in the United States. As a result the necessary real estate correction - which has occurred everywhere in the western world except Austrailia and Canada - was reversed in 2009.

And between mid 2009 and 2010 the Canadian real estate bubble was re-inflated.

So just how much exposure had the CMHC racked up by mid 2010?

According to this CBC report CMHC is now on the hook for over $770 Billion in secured mortgages.

$100 Billion in 2006 to $770 Billion in 2010!

Therein lies the fuel source of Canada's, and Vancouver's, massive housing bubble.

James Grant, editor of Grant's Interest Rate Observer, connects the dots to paint the picture the blogosphere has been warning about for the last few years.

Grant notes that an IMF study has concluded that Canadian house prices are 60% above their historical average. The median Canadian house - which is the price at which exactly half are cheaper and half are more expensive - is "certifiably unaffordable" in Canada. In fact, a typical house eats up just more than 40% of income. In Vancouver, it's more like 73%.

Grant quotes our own Bank of Canada: "The household debt-to-income ratio has remained on an upward trend ... as debt accumulation continues to outpace the growth in disposable income."

And then there is the CMHC. While it guarantees $770 Billion in mortgages, it only has about $9 billion in equity, a massively overextended position.

CBC notes that "it's more leverage than any U.S. bank or lending institution ever had."

Grant adds it all up and suggests that Canada is on the cusp of a real estate crash as severe as the one that the U.S. just went through, a crash that is just around the corner.

It's a warning that falls on deaf ears in our little hamlet on the Edge of the Rainforest, however.

Back on June 28th, 2010 MSNBC wrote that Vancouver is in denial over it's housing bubble.

Not only were we in denial then, but as real estate sales collapse in June, July and August, we are in denial now too.

Extended stagnating sales can only lead to a significant, inevitable price collapse. We saw this begin to play out in 2008/2009.

The inevitable was only postponed. And as reality looms on the horizon, everyone will claim that no one saw it coming.

"Whocouldaknown?"

The fact of the matter is the writing has been on the the wall for several years now... for anyone who wanted to read it.

It isn't different here. We're in denial just like everyone else was.

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Tuesday, August 17, 2010

Whither the empty lots?

Today the big news is the ongoing freezing up of the real estate markets.

From the Globe and Mail comes word that in Toronto the R/E market continues it's dismal performance in sales halfway through the month of August.

Meanwhile in Vancouver a contributor to the blog Vancouver Condo Info has posted sales statistics which indicate sales for new units (homes, condos, townhouses) in Vancouver West is on track to be the worst in a month of August in the last 15 years (only 6 units sold by August 17th - the worst August in the last 15 years was in 2008 when only 30 new units sold).

Ultimately the only figure that matters is price. But has noted on July 26th, there is a tremendous amount of inventory in the Vancouver market. MPC Intelligence Inc., a local market research firm, 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.

It won't be long before developers start to slash prices in a desperate attempt to dump inventory. As we have already noted, Bob Rennie slashed prices last month by 40% because he could see this writing on the wall.

Which makes one wonder about the area around the stagnating Olympic Village. Vacant lot after vacant lot surrounds Millennium (Under) Water, each with giant signs up promoting pre-sales. If the completed Olympic Village isn't selling at all, you know none of these are moving either. Driving down the deserted 1st Avenue, I couldn't help but think that the area looked like some American ghetto... albeit one where the buildings and streets were brand spanking new.

It was eerie.


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Monday, August 16, 2010

Krugman talks about Canada

Sorry about the lack of posts for the last few days. I have been enjoying the glorious weather and it has left little time for sitting down at the computer.

If anyone reads the comments section, you will note that the seller referred to in the last post has opted to contribute a comment to the blog.

For those who do not know, the real purpose of this blog is to augment the lively debates I have with my work colleagues. I preach my real estate/economic mantra ad nauseum and, rather that torment my colleagues 24/7, I try to restrict my thoughts to only half my waking hours. Referencing articles, reposting info from other sources... that's what I use this blog for: a place where colleagues who are really interested come, read and then the conversation at work moves outward from there.

(Of course, this is the world wide web. And a side benefit is that so many others around the Province, Country, World had stumbled across this site. I benefit from those others who share their thoughts with me and I am pleased anyone really cares enough to drop in here to read what I have to offer on any given day.)

Currently at work there is an interesting situation developing. Two co-workers have recently sold their homes. Both have taken dramatically different paths when it came to selling and what they are going to do with the proceeds.

In the last post I outlined one of them. Both have, this week, given me permission to speak more in depth about their general situations.

Later this week I will expand on them (and hopefully you will see at least one of them once again offer their own thoughts in the comments section.

Today, however, I note with keen interest that Paul Krugman has been moved to comment on the Canadian economy and real estate situation.

Krugman is an American economist, Professor of Economics and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times. In 2008 he won the Nobel Memorial Prize in Economics for his contributions to New Trade Theory and New Economic Geography. He was also voted sixth in a 2005 global poll of the world's top 100 intellectuals by Prospect.

But above all he is the leading media champion of the Kenysian stimulus being used to combat the current worldwide economic crisis... which means, I am not a great fan.

To his credit, however, Krugman saw the housing collapse coming in the United States long before many others did (see, amongst others, this article he wrote in August 2005.

Now Krugman has some interesting thoughts about Canada. Speaking to the Canadian Bar Association on Sunday, Krugman spoke of the impending economic buffeting that is about to hit Canada.

Mr. Krugman said that Canada cannot be complacent in the face of disturbingly bleak global conditions, because Canadians spend too much relative to their household incomes and that our country's housing bubble has yet to burst.

(which is exactly what has been said here).

“Canada is by no means insulated,” he said. “Canadians borrow an awful lot. Savings rates have been very low. Household debt relative to income is very high here.”

Krugman recognises what so many of us seem completely oblivious towards as we carry on with our day to day lives. He expressed grave concern that the world economy is “drifting” along with high unemployment rates and low consumer spending instead of steadily recovering. Our biggest trading partner, the United States, is facing propects for its economy that are dismal: “I don't see when it will end.”

“Interest rates are as low as they can go, yet the economy is depressed,” he said. “This is a very weird place to be... When everyone decides that they want to save more and spend less, the economy shrinks. And when the economy shrinks, businesses see even less reason to invest and so investment falls.”

It means there are dark economic times ahead, but how many people in our everyday lives understand and appeciate that?

Krugman noted that interest rates are getting so low that it will soon be impossible for central governments to use them as a lever to stimulate borrowing and spending.

“The traditional response has run out of ammunition. It’s about as low as you can go,” Mr. Krugman said. “So we have depressed economies that need a solution.”

Krugman didn't go there, but I continue to maintain the writing is clearly on the wall. There is a tremendous amount of deleveraging to be done around the world - and particularly in Canada.

In Canadian real estate, it has only just begun.

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Tuesday, August 10, 2010

Will seller's try to wait out the downturn?

As the summer creeps into it's second half, you can smell the season starting to turn. The air has a cooler edge to it and my yard fills with the early leaves that are starting to fall.

In Real Estate, the malaise of June/July continues.

Early statistics suggest that we could be on track for 2nd worst August for sales since 2000. 2008 would be the one year which could be worse that this. It seems listings are trending higher which, as the esteemed VHB notes on one blog, is rare as August listings have only been higher than July’s twice in the last 10 years.

Another interesting tidbit I came across. Apparently, the average person in BC makes almost $10,000 more than he/she did in 2001. But the average house costs $450,000 more than it did in 2001.

This is a stunning 45x the rate of income growth.

How could the market start to falter?

But sales are occurring.

A co-worker has sold his condo this month. And his story is telling.

Adament that he would not accept less than $800,000 for the condo he paid $300,000 for 10 years ago, he was prepared to rent it out rather than go below this artificial threshold.

After negotiating over an original offer of $760,000, a Hong Kong buyer finally closed on the sale.

It's interesting because it is tangible evidence that there is Asian money is still at play in this market. The HK buyers were keen to be set up in Vancouver before school starts in September, so pressure was applied to the real estate agents (on both sides) to cut their commissions in half.

End result was that my co-worker got is plus-$800,000 price, the HK couple got their price; and the R/E agents took a big haircut on their commissions to make the deal happen.

It will be interesting to see how many other sellers are prepared to follow a similar path: wanting to sell but defiant that they will not cut their asking price.

How many will follow through on their threat and pull their listing in favour of renting?

In this particular case, pulling the listing and renting wouldn't have been a problem because the mortgage owing is low enought to allow rent at market rates.

It will be interesting to see how many sellers actually go this route.

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Saturday, August 7, 2010

Has our reckoning started?

Real Estate never goes down.

Throughout North America that has been the sentiment. And when the dot com bubble burst at the turn of the century, stimulus money flowed into the next great bubble: Real Estate.

And with it, the 'real-estate-never-goes-down' mantra became a truism.

So when the bubble started to burst in the United States, defenders trumpeted how their particular area "was different."

So much so that "it's different here" has become a rallying cry in city, after city, after city.

And it hasn't just been cities.

It was different in Florida, it was different in New York, it was different in California.

It was also different in Ireland, England, and Spain.

The reality, of course, is that it wasn't.

And in those countries where the bubble has yet to burst, most notably Australia and Canada, an unsettling sense of concern is beginning to spread.

In response... the same rationalization takes hold: 'it's different here'.

All across Canada this refrain reigns. And no where, it seems, as loudly as in the Village on the Edge of the Rainforest.

When the collapse started, in 2008, the standard denials were uttered. And when massive stimulus seemed to counteract the collapse - the chorus only intensified.

But was our reckoning merely postponed?

We have written about Bob Rennie as a bellwether. And there is no doubt concern is mounting in the real estate industry.

Now articles are starting to appear that suggest the tide is turning across our Canada.

In the Financial Post appears this article, 'Getting real: Bull run coming to an end for Canada's housing'

In it a couple from Canmore, Alberta is profiled.

A condominium they bought three years ago currently languishes on the market.

Kept as an investment when they purchased another home, it has now become an albatross.

“It never occurred to us that we wouldn’t be able to sell for what we paid,” says the couple.. “People were making $100,000 [on paper] a year on their condos.”

Bought for $315,000, the couple will be lucky to get their money back when it finally sells. Worse, in the meantime they are only reaping $1,100 a month in rent while their investment costs them $1,800 a month to carry. And as it languishes ont he market, the property isn’t going up in value.

Now, forced to also sell the other house they bought, they are also unable to get what they originally paid for that property, never mind the over $30,000 they have invested since buying it.

So they have two properties which hang like albatrosses around their necks.

It is the American Experience speading to Canada.

As the Financial Post notes,

  • "Their tale is one not often heard over the last decade, the longest bull run in Canadian housing history. People have been competing wildly for homes and double-digit annual price increases have been the norm. The market corrected slightly in 2008, but the correction was short-lived. Average prices in Canada dropped 10.2% in the first quarter of 2009 from the previous year, but rebounded dramatically. By the fourth quarter of last year, prices had jumped 19.1% from a year earlier.

    But the market appears to be slowing again. Last quarter, prices were up just 5.2% from a year ago and July sales dropped as much as 40% from last year in some major markets. Even if there is no U.S.-style collapse, everybody from the consumer to the mortgage broker to the real agent may have to accept a new real estate reality: For the first time in a decade, housing might become boring, with flat sales and price increases just ahead of inflation."

Compared to a U.S-style collapse, boring would be a godsend.

In the second half of 2010, the story we will be following is how this all plays out. Will we simply see a flat market in Canada? Or has our own reckoning started?

In Alberta they are discovering that Canada, as a whole, may not be different from the United States after all.

In Vancouver one constant remains: the mantra of 'its different here' continues to reign supreme. Things may be bad in Alberta, but Vancouver is... you know... different!

Will that mantra be shaken in our fair Village during the latter half of this year?

We will see.

Colbert Popcorn
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Thursday, August 5, 2010

I light a fire...

Faithful readers know that in the inflation/deflation debate I side solidly on the side of looming inflation.

We may go through a period of deflation first... but inflation is coming: guaranteed.

That's why I note today's decision by the Bank of England to keep interest rates at historic lows.

Bank of England Governor Mervyn King has announced he is setting aside his inflation target to protect the economy from the biggest budget cuts since World War II.

And this action is taken as a split widens on the nine-member British Monetary Policy Committee (MPC) on the danger posed by rising prices. Resisting calls to increase interest rates, King insists it may be a “considerable” time before the benchmark interest rate of 0.5 percent returns to “normal.”

Prices continue to rise in England and King is tolerating faster inflation as Prime Minister David Cameron’s push to slash the Group of 20’s largest budget deficit threatens to hurt the economic recovery. Policy maker Andrew Sentance, for now the only advocate of higher rates, counters that growth is solid enough for the bank to withdraw emergency stimulus.

Inflation has exceeded the bank’s 2% target since December.

“King is willing to take risks with inflation,” said Steven Bell, chief economist at London-based hedge fund GLC Ltd. and a former U.K. Treasury official.

The combination of persistent inflation and budget cuts has widened the debate about when to raise rates in England.

Sentance voted for higher rates at the last two meetings of the MPC. And while there are calls for the central bank to be “incredibly vigilant” on prices, inflation was allowed to rise to 3.2% in June and has exceeded the government’s 3% limit since March.

King said last week the rate is likely to stay above the bank’s target “for much of next year”. King “sees no need to try and offset what is likely to be rather a temporary continuing overshoot,” said former Bank of England policy maker Charles Goodhart.

Fears of continued recession have economists and central bankers eager to ignite inflation and King's actions are sure to be echoed in North America.

Goodhart says officials may find it hard to justify their actions after a “pretty poor” forecasting record in the past two years.

With the inflation overshoot set to persist. Goodhart make an interesting observation.

“In a sense we’re in the worst possible situation, with inflation above target and output growth well under target.”

Meanwhile, on the real estate front in Vancouver

Check out this Global TV clip on the declining real estate sales environment.

How desperate is the climate getting in the industry?

At the end of the clip we have our favorite downtown huckster, Ian Watt, actively encouraging buyers to start pitching low ball offers to undercut asking prices.

Will wonders ever cease?

(hat tip to Observer in yesterday's comments)

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Wednesday, August 4, 2010

You have to know when to hold them...

Today the 'official' July 2010 real estate sales statistics were released for both Greater Vancouver and the Fraser Valley.

And as we posted on the weekend, the picture is not pretty.

How ugly is it, you ask?

“We didn’t anticipate this level of change,” said Deanna Horn, Fraser Valley Real Estate Board President.

Of course the inability of the Real Estate Boards to 'anticipate' is almost considered a joke on the real estate blogs, as this post over on VREAA illuminates.

As expected, the Greater Vancouver Residential Benchmark price is down for the third consecutive month:

April, 2010: $593,419
May, 2010: $590,662
June, 2010: $580,237
July, 2010: $577,074

Sales in July fell 45% from the same month last year, and prices have fallen 2.8% since peaking in April... not quite a 'crash' by any stretch of the imagination, but the endgame is clearly afoot.

According to the Real Estate Board of Greater Vancouver (REBGV) the supply of properties for sale has increased so significantly that the decline in sales now threatens to pull prices lower, with inventory levels 33% higher than this time last year.

In fact, the REBGV now calls Vancouver a “buyer’s market,” which seems odd because clearly people aren't buying.

Is this a temporary lull or the start of a significant drop in real estate values? That, of course, is the central question being debated by the R/E bulls and bears.

Once again I feel compelled to cast an eye towards Bob Rennie, Vancouver's anointed condo king.

His stunning marketing moves to slash prices by 40% in both the Okanagan and for condos in Vancouver at the luxury Fairfield Estates serve as a bellwether.

The market is changing and he is responding by attempting to stay ahead of the curve. Either Rennie is throwing away massive potential profits or he is facilitating significant reductions in advance of a bloodbath starting in earnest.

When the 'crash' starts with 40% reductions from the market's biggest player, the prognosis in Camp Rennie can't be very bright.

A good gambler knows when to hold... and when to fold.

And Rennie does not appear to be willing to up the ante.

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Monday, August 2, 2010

A stunning statement by Greenspan

Local blogs continue to ruminate on the pending release this week of the R/E sales statistics for the month of July.

(And for those who are interested in such numbers there is a breakdown at the bottom of this post of the Unit sales per municipality and the percentage drop experienced from July 2009 vs July 2010)

But there was something mentioned on Sunday morning political TV that will ultimately impact Vancouver Real Estate far more profoundly than the start of this current downward trend.

For those of you who believe interest rates will never rise again because the government will not allow it - heed these words of former US Federal Reserve chairman Alan Greenspan;

"There is no doubt that the federal funds rate can be fixed at what the Fed wants it to be but what the government has no control over is long-term interest rates and long-term interest rates are what make the economy move. And if this budget problem eventually merges to the point where it begins to become very toxic, it will be reflected in rising long-term interest rates, rising mortgage rates, lower housing. At the moment there is no sign of that because the financial system is broke and you can not have inflation if the financial system is not working."

In other words, we will be in deflation until the broken financial system is unbroken. And when it does start to repair - look out - because we will then have severe inflation.

And THAT will make this months declining sales numbers look like a selling bonanza.

You can see the Greenspan clip here.

For those are interested, statistics by area from the same source as yesterday:

Real Estate Unit sales comparing July 2009 to 2010

Burnaby East: -64% (57 to 20)
Burnaby North: -47% (215 to 112)
Burnaby South: -52% (257 to 123)
Coquitlam: -45% (304 to 166)
Islands-Van. & Gulf: -75% (12 to 3)
Ladner: -77% (79 - 18)
Maple Ridge: -36% (215 to 136)
New Westminster: -52% (170 to 80)
North Vancouver: -42% (273 to 158)
Pitt Meadows: -46% (41 to 22)
Port Coquitlam: -50% (152 to 75)
Port Moody: -47% (119 to 62)
Richmond: -53% (632 to 292)
Squamish: -3% (31 to 30)
Tsawwassen: -56% (55 to 24)
Vancouver East: -42% (461 to 267)
Vancouver West: -37% (880 to 553)
West Vancouver: -20% (97 to 77)
Whistler: -45% (35 to 19)

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Sunday, August 1, 2010

July Stats

Over the course of the month we have blogged about dramatic reductions in real estate prices in the Okanagan, and Bob Rennie bringing dramatic reductions to the Fairmont Estates condos in downtown Vancouver.

Next week the R/E sales numbers for the month of July will be released and they will not paint a pretty picture.

Over at the blog Vancouver Condo Info, contributors to the comments section have been bringing us some of the numbers. I invite you to persue the comments section for all their contributions.

If the data is accurate, final sales numbers for total unit sales are down 45% from July 2009. The total number of unit sales is the 2nd lowest in a decade.

Here are the total unit sales for the month of July since 1995:



July = UNITS
1995 = 1978
1996 = 2100
1997 = 2303
1998 = 1816
1999 = 2181
2000 = 1710
2001 = 2737
2002 = 2759
2003 = 4140
2004 = 3114
2005 = 3825
2006 = 2802
2007 = 3955
2008 = 2215
2009 = 4197
2010 = 2297


Meanwhile the story in new home sales is even more dramatic. New home sales in July 2010 compared to July 2009 are down an astonishing 70%. The total number of new home sales for July 2010 is the lowest since 1995.


YEAR= UNITS
1995 = 296
1996 = 442
1997 = 350
1998 = 311
1999 = 298
2000 = 205
2001 = 288
2002 = 221
2003 = 488
2004 = 343
2005 = 724
2006 = 445
2007 = 503
2008 = 215
2009 = 441
2010 = 129


Earlier this month we profiled how the benchmark price on the west side of the City of Vancouver had dropped a dramatic $91,000 in the month of June.

Well the west side continues to get hammered.

According to figures supplied by real estate agent Larry Yatkowsky:

  • Median price on the west side is down 8.6% in July (and almost 13% in the last 2 months),
  • Average price is down 12.7% in July alone,
  • Sales are down 60% from June,
  • And price reductions have been 4 times greater than sales.

Mr. Yatokowsky offered the following comments on the current real estate market;

"The predominant factor is the slow drop in the number of listings combined with continuing price reductions. Prices appear to be dropping steadily and the number of listing mandates that are failing to sell are increasing. How many ‘failed to sell’ listings will we see in the weeks ahead – the numbers are climbing? How many come back to market to ‘try again’?

A great number of sellers still want to sell but buyers are reticent to jump in – they remain uncertain except for one thing – just are not ready to pay the prices sellers are asking. What is known is that the stronger hand being played by buyers is currently winning. Until sales begin to increase we can expect this state of market to continue. In the days and weeks ahead is that sellers will be forced to make further and substantial price adjustments before that happens."


And so it goes...

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