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Thursday, September 30, 2010

The Bank of Canada repeats its warning to you: Curb your enthusiasm for debt!

You will recall the other day that I commented on the fact that the finances of most Canadian households are in abysmal shape.

It is one of the key factors that will contribute to Vancouver's status as ground zero in a monumental housing collapse.

Last Friday I said that numerous economic reports have cited that debt is out of control in this country. Canadians have saddled themselves with record mortgage debt as household liabilities are now equal to 145% of earned income. Six in ten Canadians now live paycheque to paycheque. 40% are not even trying to save money anymore because there is no money left over after daily expenses.

As faithful readers know, my number one recommendation over the past two years has been that, if you are in debt, get out of it... now!

And today Mark Carney, the Governor of the Bank of Canada - and the man who plays a large role in influencing interest rates, issued yet another warning to Canadians on just this subject.

Using particularly strong language (for the head of a Central Bank), Carney warned Canadians today to curb their enthusiasm for debt. In a midday speech to the Windsor-Essex Regional Chamber of Commerce, Carney echoed my warning about the perils of the fact that the ratio of household debt to disposable income hit 146% in the first quarter of the year, a record and a level that is closing in on that of the U.S.

"This cannot continue," the central bank chief warned, adding that while the net worth of Canadians is about six times the level of average disposable income, asset prices rise and fall but "debt endures."

Carney can see what I see.

We're in a tenuous position. Real Estate doesn't always go up. And many believe real estate is set to go down. How much it will go down depends on your particular slant. And as many of you know, my slant is 50 - 70%, minimum. And I lean heavily to the 70% minimum end.

Any kind of decline in asset prices will amplify and exacerbate this precarious Canadian debt position.

  • "House prices matter principally because of the “financial-accelerator effect.” When the value of a house rises, the owner can typically borrow against this increased equity to fund home renovations, a second house, or other goods and services. These expenditures can “accelerate” a rise in house prices, reinforcing the increase in collateral values, access to additional borrowing, and, thus, an increase in household spending. Of course, this accelerator effect can also work in reverse: a decrease in house price tends to reduce household borrowing capacity and amplify the decline in spending."

Carney also noted that,

  • "With Canadians working, but not as much as they would like, they have been borrowing. Real household credit expanded rapidly throughout the recession, in contrast to previous downturns, and has continued to grow through the recovery. Canadian households have now collectively run a net financial deficit for 37 consecutive quarters. That is, their investment in housing has outstripped their total savings for over nine straight years. In effect, households are demanding funds from the rest of the economy, rather than providing them, as had been the case through the 1960s, 1970s, 1980s and 1990s."

This focus on plunging all our eggs into home mortgages is important. With more and more of our disposable income going to monthly mortgage payments, Carney observed that household balance sheets are growing "increasingly stretched."

But what about our economy? Isn't it growing? Aren't we out of the recession with everything getting better and our paycheques growing?

Carney noted that while Canada’s recovery has been the envy of the Group of 7, but that recovery has relied on levels of consumer spending and investment in housing that are proving unsustainable.

Translation: The economy has relied on the fact we have been borrowing our asses off and plunging ourselves into record debt - courtesy of Carney's emergency level, record low, interest rates.

Carney's warning was simple and straightforward and he reduced it to 3 simple words:

"This cannot continue."

You would be wise to take heed, if you haven't already.

What's coming won't be pretty.

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Wednesday, September 29, 2010

More on the currency debate... (btw, Garth Turner sees Gold going to $3,000)

No real estate topics today... instead it's devaluing currencies of the world, gold and what will come as a surprise to many: Garth Turner sees Gold going to $3,000 an ounce.

All around the world there is a stunning drama unfolding. Country after country is devaluing their currency through massive quantitative easing in an attempt to make their exports more attractive because - via foreign exchange - their currency is worth less than other countries as those countries devalue. It's becoming a vicious cycle.

Brazil is warning of a currency war, the Bank of Israel buys $250 million in forex to weaken the shekel, Chile considers measures to combat strong peso, intervention in Taiwan dollar suspected of bringing value down, Korea considers moves to stabilze, Singapore intervenes to devalue currency, and Japan considers more moves to devalue currency.

There's more, but you get the picture.

All of this is in response to the United States and the rapid dropping of the US dollar index (it's one of the graphs on the right hand side of the blog).

Click here for a Reuters clip on the fears over a world currency battle.

This is one of the feared outcomes of the Quantitative Easing that was started last year. And the great fear is that the US Federal Reserve's actions to prop up the increasingly uncompetitive and defective U.S. economy with what amounts to unprecedented amounts of money printing over the past two years - with efforts still ongoing and slated to expand later this year - are going to lead to a crisis of confidence.

The US government as a whole has increasingly spent beyond its means, doubled down on debt and pushed the limits of inflation risks as it milks the outdated perception of the dollar as a "safe haven" for all it's worth.

The largest critics say the table is being set for the biggest currency crisis ever. Some say that all of the key ingredients are in place for a crisis of confidence that will threaten to overwhelm all efforts to contain it - something beyond the magnitude of currency crises that unraveled Mexico in 1994, Asia in 1997, Russia in 1998, and Argentina in 1999.

That's why I say there is an opportunity looming.

It's irrelevant whether you believe the crisis will lead to hyper-inflation or not. A crisis will play out. The only question is the depth and breadth of the magnitude.

Gold (and Silver) are the final refuge against universal currency debasement. And that debasement is starting to ramp up big time.

The US and Britain are debasing coinage to alleviate the pain of debt-busts, and to revive their export industries: China is debasing to off-load its manufacturing overcapacity on to the rest of the world, though it has a trade surplus with the US of $20bn (£12.6bn) a month. And the rest of the world is racing them to the bottom.

Premier Wen Jiabao confesses that China’s ability to maintain social order depends on a suppressed currency. A 20pc revaluation would be unbearable. “I can’t imagine how many Chinese factories will go bankrupt, how many Chinese workers will lose their jobs,” he said.

Commodities analyst Dan Norcini notes, Gold put in another record high price in late Asian/early European trading last evening with silver also following closely behind as it too set another 30 year high during the same interval. As a matter of fact, all of the “precious” metals were higher today with platinum and palladium continuing to work higher on the charts. Palladium is probably the sleeper among the group as it has quietly managed to rally from $160 in late 2008 to nearly $570 as of today. That is a 250% increase in 2 years.

One of the things about the palladium rally is that it now leaves silver as the least expensive precious metal to own. Yes, I know that palladium and platinum are considered industrial metals but they too, as does silver, often act as precious metals. Gold is now over $1300, platinum is over $1650, and palladium is near $570. None of them could be considered especially cheap for the average citizen to buy. Silver however, even after its strong rally is shy of $22. Tell me that the average citizen who has a few hundred dollars laying around and is becoming increasingly worried about the future of the Dollar as they become informed about the woes of the current monetary system, will not look at these metals and feel very comfortable plopping down some cash on the counter for a few rounds of silver."


Which brings us to Garth Turner.

For those who follow Turner, they know he is adamant that Gold is a relic and not a place to put your money.

But Turner can see what is happening too. In this interview with Stirling Faux on Howestreet.com he begrudging admits that gold will still climb further...

(http://www.howestreet.com/goldradio/index.php/mediaplayer/1784).

Towards the end of the interview, at the 10:23 mark, Turner dismisses Gold rising up in price but stumbles and concedes that "yeah... it may go to $3,000. But not $5,000 or $10,000".

Hands up out there how many thought they would ever hear Turner predict Gold at $3,000 an ounce?

Such is the import of what is happening right now.

Does anyone remember how this all started?

And the world is dealing with it... taking it a 'little more seriously'.

They are moving out of the US dollar and into Gold/Silver. Do you see the opportunity?

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Tuesday, September 28, 2010

Do you see what I see?

As a child, everyone has seen the picture above which is the visual definition of "perception".

Some see the image of a young woman. Others can clearly see the image of an old woman.

Same image, two different perceptions.

And the same can be said of real estate in the Village on the Edge of the Rainforest. Yesterday the little red-headed girl told me she spends her weekends going to open houses, house lust working it's elusive magic.

Sigh.

Don't people see the picture I see?

Bouncing around the Internet today is like going from site to site with confirmation of so many of last year's blog insights playing themselves out in living colour.

Aren't they evident to all?

You've often see me refer to the Vancouver Real Estate Anecdote Archive, a blog which collects anecdotes found on various blogs or in mainstream media. Since most are anonymous, it is impossible to confirm the validity of the comments but they are interesting. What stands out are the number of comments being made by people who are starting to worry about their real estate purchases.

Some recent comments (click on first two words for link):

  • A buddy of mine on the Island put his home on the market in August…..not a sniff. He is freaking out as he had hoped to ‘move-up’ and is carrying a big monthly mortgage.”

    I’m in the financial industry. People are one or two paycheques or missed mortgage payments away from real disaster. I think that bankruptcies will unfortunately become commonplace.”

These comments are reflective of events now unfolding as many of us in the blogosphere have predicted. Yesterday the chief economist of Gluskin Sheff + Associates, David Rosenberg, came out with a report that notes that housing starts, building permits and home prices have slipped.

Canada's recovery from the recession has been fuelled by the boom in the housing sector, a boom which was driven by the emergency level interest rates that sucked so many Canadians into the overpriced housing market over the past year. But that 'stimulus' has run it's course, the 'recovery' is now slowing, and "that goose is no longer laying any golden eggs."

Rosenberg foresees that same scenario we have been fearful of. He expects that a "rising number" of Canadian homeowners won't be able to meet their mortgage payments as interest rates rise and real estate values sink.

"Housing cycles, both up and down, tend to go further than anyone thinks, as we saw occur in the United States, which is still suffering from a post-bubble hangover three years after the initial turn down. Even if this correction in housing is a fraction as harsh as was the case south of the border, the economy, and the financial markets, are likely in for a rude awakening in coming quarters as lower home prices cut into household wealth, confidence and spending plans," said Rosenberg.

This comes out on the same day as a report from the Royal Bank of Canada that says home ownership costs in B.C. are quickly nearing record highs and that the result is that home ownership costs are testing the limits of household budgets. More importantly the report notes that “the Vancouver market is clearly vulnerable to a price correction."

“Generally, we have dismissed the case of housing market bubbles in Canada, but the situation in Vancouver is probably the closest to one in the country,” the report stated.

Interestingly the report calculates that the tenuous Vancouver market chews up more that 65% of pre-tax family income (the highest in the country). But this conclusion is based on buying a house at current prices with 25% down and a 25-year amortized mortgage.

Ummm... does anybody out there have a friend or acquaintance who has bought a house in Vancouver in the last five years who has paid a quarter of the purchase price in cash and has taken out a mortgage that was less than 35 years in length?

Royal's skewed analysis allows it to temper conclusions. Economist's like Rosenberg do not colour their outlook with such diversions.

The fact of the matter is that the finances of most Canadian households are in abysmal shape. As other economic reports have noted, debt is out of control in this country as Canadians have saddled themselves with record mortgage debt (household liabilities now equal 145% of earned income). Six in ten Canadians now live paycheque to paycheque. 40% are not even trying to save money anymore because there is no money left over after daily expenses.

The writing is on the wall for real estate in our little hamlet which sits on the Edge of the Rainforest. We will be ground zero for a massive real estate collapse.

Don't you see what I do?

Meanwhile... more on 'all that glitters'

Bloomberg reports that the U.S. Mint has suspended sales of its 1-ounce American Eagle gold coins after soaring commodity prices led collectors and investors to deplete supplies. It is the first time in two decades that the Mint halted sales of the coins.

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Monday, September 27, 2010

All that glitters

Interesting development in Gold today.

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

Gold is a hedge - 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 on a massive scale, it seems clear to me a large segement of the world is going to the medium of Gold on a level they haven't for almost 100 years.

Last week I made note that central banks outside of the United States cut holdings of U.S. Agency Debt by 7%.

And today, in another sign that a worldwide paradigm shift is occurring, the central banks of Europe have all but halted their sales of Gold.

In the 1990s and 2000s, central banks swapped their non- yielding bullion for sovereign debt, which gives a steady annual return. But now, central banks and investors are seeking the security of gold.

All around the world, central banks are reassessing gold amid the financial crisis and both Europe and America's sovereign debt crisis.

This is important because central banks, with their heavy selling of Gold, have long suppressed Gold from rising in price. But now a significant source of supply has been withdrawn from the market. The move also gives powerful psychological support to the gold price.

Interesting times.

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

More on this in the coming weeks.

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Saturday, September 25, 2010

Show me the money

Ultimately the great debate about real estate in the Village on the Edge of the Rainforest will come down to prices.

Will prices go up, stagnate or decline?

All these discussions about declining year over year monthly sales and building months of inventory, while indicators of what comes next, are moot until the 'what-comes-next' happens.

And it is the 'hard facts' which are now starting to appear.

What is fascinating is the depth of the declines we are seeing from the get-go with developers.

We've posted about prices being down 40-50% in the Okanagan. We've talked about Bob Rennie slashing 40% off new units at Invue in Kelowna and at Fairmont Estates in Vancouver. Up in Whistler we took a look at a condo which had been put up for court-ordered sale at 40% off the original 2002 sale price (it has now sold). Two days ago we profiled Watermark Developments discounting prices 35% below 2006 pre-sales prices.

Even to the casual observer, this is a steep and shocking start to this chapter in the real estate saga.

But as I have posted before, despite these examples, this will be a slow melt. The mainstream public is still oblivious to what is going on.

Those who don't have to sell, won't... at least for a little while yet.

They will pull listings or steadfastly refuse to budge on outrageous asking prices convinced that what we are experiencing is a temporary 'dip'... which is what most mainstream owners view the 2008/2009 pullback as. A temporary dip.

Only those who have to sell, will cut prices. Those going through divorce, settling estates because of a family member's death, or those displaced and forced to move elsewhere.

There is a another dynamic we will see though. And is it the looming wave of retiring boomers.

Boomers have never been great savers. Spending what they have and 'enjoying life', their plan has long been to use their massively appreciated real estate as their retirement fund.

Statistics show that 70% of boomers have not saved adequately for retirement if at all. Their retirement 'plan' lies in tapping the giant equity jackpot of the massive real estate bubble that has blown around us.

But as sales drop dramatically, as months of inventory build... a stagnating real estate market is fodder for the one demographic beyond the three D's (divorce, death, displacement) who will reduce their price to sell.

Faithful readers will recall one such example we cited in the middle of July.

Promoted as an outstanding Dunbar character home in immaculate, move-in condition, this 3,359 square foot 4 bedroom, 2 bathroom home which sits on a 6,700 square foot lot was offered for sale.

Originally listed for sale at $1.549,000 on June 7th, 2010, the price was reduced on June 12th, 2010 the asking price was reduced to $1.449,000 (a reduction of $100,000) a mere 5 days after the property was originally listed!

And with no one jumping in on that, the seller obviously received an offer from a buyer sensing the desperation and on July 6th, 2010 the home sold for $1,340,000 (another $109,000 shaved off the latest asking price).

That's a total drop of $209,000 (or 13.5%) off the original asking price with a property only on the market for a month.

More recently is this example at 3042 West 33rd Avenue in Dunbar from our friends over at VREAA.

This 2,489 sqft home on a 50×133 lot was listed on May 28th, 2010 for $1,638,000.

On June 22nd, 2010 the asking price was dropped to $1,580,000, then to $1,550,000 and then yanked from the market on Aug 31st, 2010.

Later that day the property was relisted with and asking price of $1,499,000.

It finally sold on September 19th, 2010 for $1,370,000... $268,000 less than the original asking price (just over 16%).

Both of these are a far cry from the 40-50% examples above, but provide evidence that there are desperate sellers who will move their price to see a sale.

If the market continues to stagnate, more and more boomers who have to sell will overcome resistance and cut prices.

That 'stubbornness' giving way to compromise can be seen in this Kelowna offering which a faithful reader has passed on to us.

Located at 740 Wilson Avenue, faithful reader advises that they have been watching this house for the past 6 months when it was listed in late April or early May.

Mortgage free, the now retired owner was hoping to reap the capital gains from a home which has appreciated rapidly these past 15 years.

The house was originally listed at $429,000 and quickly dropped to $399,000.

With no offers received whatsoever, the owner was no doubt shocked when a similar house across the street was listed for $340,000 - an asking almost $89,000 less that her original asking price. That lowball house sold within a month!

In July, the owner was offered $375,000... and promptly rejected.

Now, several months later, the asking price has been reduced to $344,000. Stubbornness is beginning to give way to desperation.

Faithful reader offers this observation on the Kelowna market:

  • "I know other people in Kelowna who are also trying to sell their houses. Unfortunately many of them are mortgaged to the max and can't drop the price even a penny. And so they linger on the market for months and months. And there are many others, people in their 30s, who bought at the height of the boom (presales happened in Kelowna too), and are now sitting in negative equity territory, or pretty close. I know a few who are amateur landlords-and the rent doesn't even cover the mortgage! Everyone was convinced they would get rich by owning real estate. Why buy one place when you can buy 2 or 3? And I don't think it will get any better... there are lots of condos for sale, and according a realtor friend of mine, a huge inventory of condos that aren't listed-people waiting for the market to "recover" before they list.?"

MOI, declining year over year monthly sales totals... they are only symptoms.

It's all about results... about values.

The developers are slashing 40-50% and saying, "SHOW ME THE MONEY".

The boomers who are depending on their homes as retirement funds have to sell and are starting to say, "SHOW ME THE MONEY".

We will see what the result is in the coming months.

(What about you? Are there any properties you have been watching that have been dropping their asking price? If yes, drop me an email and tell me about it.)

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Friday, September 24, 2010

How can we be so blind?

Yesterday I mentioned that I had an encounter with James, a casual acquaintance of mine who happens to be Scottish (he's a tolerable guy though, so we overlook that).

I've known James for almost 20 years, but yesterday was the first time we had ever talked about real estate... and it was an intense 15 minute conversation in which he hit on just about every stereotypical defense for real estate.

'Real Estate never goes down, you can't ever go wrong buying and our solid Canadian banking system won't facilitate any sort of collapse here.'

It was almost a surreal encounter.

But it speaks volumes.

Mainstream Canada is still completely unaware. They have bought into the 'official' line that everything is alright.

And perhaps it is just as well. Can you imagine the panic to dump real estate were it any different?

The average Canadian is blissfully ignorant about what has happened... about what is happening... about what is about to happen.

They are completely unaware about how our Canadian banks barely escaped their own meltdown in 2008.

Few realize all five Canadian banks are levered at an average of 31:1 and that if tangible assets were to drop by 3% in value, tangible common equity would effectively be wiped out.

Nor do many realize that Canadian Banks were bailed out by receiving $65 billion in liquidity injections from the Insured Mortgage Purchase Program (IMPP) in 2008 - Canada's version of TARP - whereby the CMHC purchased insured mortgages from Canadian banks to provide additional liquidity on the asset side of their balance sheets.

No one seems to be aware that the Bank of Canada then gave our Canadian Banks an additional $45 billion in temporary liquidity facilities or that the Canada Pension Plan, through the purchase of $4 billion in mortgages prior to the IMPP program, raised the total government bailout to $114 billion.

And what about the CMHC being ordered by the Federal Government to approve as many high risk borrowers as possible to prop up the housing market (with entry level buyers) and keep credit flowing?
  • In 2008 some 42% of all high risk applications were approved, a 33% increase over 2007.
  • 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 - which was the only way we managed to keep credit flowing in our country while it dried up in the USA.
Canadians are oblivious.

They can't see how this all impacted the debt orgy. Aren't aware of how CMHC's obligation has grown from $100 Billion in 2006 to $776 Billion in 2010.

Last year the Conservative Government, after our nation spent 10 years digging ourselves out of a $45 Billion deficit with onerous taxes like the GST and years of cutbacks in government services, replunged us back into hock with a record breaking $50 Billion deficit.

If CMHC is forced to pay out on a mere 10% of that guaranteed $776 Billion, that amount would more that double that historic $50 Billion debt.

But the average Canadian is completely oblivious.

They sincerely believe that our secure, non-bailed out Canadian banks don't lend to 'risky borrowers'.

They are wilfully blinded to the ads all around them whereby someone with no money can go out and, courtesy of bank initiatives like this one that offers them 7% back, can get their 5% downpayment covered and actually get PAID 2% of the mortgage value to make that purchase.

Nothing down and get PAID to buy a house!!!

No... we don't see it.

We tell ourselves we aren't making the same mistakes the Americans did. And we do it with blatant ignorance.

But Americans can see it.

When I spoke to two tourists from Minnesota in August, they asked what the interest rate was on a 30 year mortgage here. When they found out virtually no Canadians have long term mortgages... that the vast majority have 5 year terms or less that reset at whatever the going interest rate is... they recoiled in shock. They instantly recognizing that all Canadian mortgages are set up exactly like American subprime mortgages: 2-5 year low teaser rates that reset higher once the teaser term is over.

But the average Canadian is oblivious.

We bailed out our Banks.

We allow people with no money to buy houses (which has driven up the price of our real estate exponentially).

We have a vastly higher percentage of Canadians juiced on teaser rate mortgages, mortgages they can afford now but for which the vast majority will not be able to afford when rates reset higher.

And when interest rates do climb higher, our real estate market will implode just as spectacularly as California, Phoenix or Florida.

That collapse has already started. As I have shown you in posts this month
  • Okanagan Real Estate has stagnated and properties are down 50%,
  • Victoria Real Estate, after three previous months of sales down by over 40% from the same month last year, are on target for a 75% decline this month,
  • Vancouver is on track for a fourth consecutive month where sales are 40% down from the same month last year,
  • Bob Rennie is selling luxury condos downtown at the Fairmont Estates for 40% off their March prices, and
  • in Surrey developers are offering units for 35% off their 2006 pre-sale price.
We are like the people in South East Asia who, on Boxing Day 2004, witnessed the sea drain from their shores.

Not sensing the danger, they ventured out to check out the tidal flats in wide-eyed wonderment only to realize, too late, the danger as they tried to flee for their lives from the crushing Tsunami barreling down on them.

The only difference is that the South East Asians didn't witness a neighbour go through the same situation 3 years earlier and then make the same mistakes.

Canadians saw the Housing Tsunami strike America, the UK and Europe. We have no excuse for not seeing this coming.

Yesterday my friend James revelled in calling me a doomer.

I perfer the term 'rational realist', myself.

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Thursday, September 23, 2010

Developer says consumers being misled about strength of housing market!

Stunning little news article in the Peach Arch News, a Surrey community newspaper.

In a statement issued by Watermark Developments, the South Surrey developer says consumers are being misled to believe the housing market is stronger than it really is.

Watermark Developments is currently in the midst of offloading unsold inventory at below-market prices. “In contrast to this situation, which is clearly indicative of a sagging market, realtors... are blogging about how ‘hot’ the market is,” reads a statement issued on Monday by Watermark's hired realtor Salome Sallehy.

“Some realtors are putting the wrong perception out there,” Sallehy explained. “Inventory is just not moving because the market isn’t willing to bear those prices. Developers aren’t really acknowledging that.”

Sallehy comments come a couple of days before Watermark starts offering 37 units for sale on Saturday at prices that are 35% below what the units were sold for during pre-sales in 2006.

Yes... you read that correctly - 35% BELOW 2006 pre-sale prices.

All this on a day when I stood out in the rain at UBC and listened to a Scottish acquaintance of mine (we'll call him James) laugh at me for predicting a bursting housing bubble in Vancouver.

"Real Estate never goes down," he guffawed at me.

I shrugged and told him I was adamant about my belief and was putting myself out there for ridicule if five years from now I was proven wrong.

"Out there? You're putting your head on the chopping block, you know that," James chortled.

Guess he won't be taking me up on my advice to sell at least one of the two homes he owns so that he can cash out on his equity while he can.

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Wednesday, September 22, 2010

Will the economy hit a sudden wall? And Flip and Dip, baby! Flip and Dip.

One of the tales of malarky you hear by those rationalizing that the economy is turning around, it that the US consumer is bearing down and paying down debt. This, the argument goes, augers well for the return of balance.

Well, not so fast.

As the Wall Street Journal notes, this isn't what is actually happening at all. The reality is that over the past two years, US consumers have not been deleveraging as a voluntary act of eliminating debt, but have been actually aggressively leveraging more and more until the bank providing them credit puts them into involuntary bankruptcy, cutting off the money flow.

This is a startling realization.

What it means is that the average American is actually hyperleveraging to the point where all available credit is forcefully eliminated by a lender institution in one fell swoop!

The data outlined by the WSJ confirms that of the over $600 billion in deleveraging that has occurred, only $20 billion or so of it was voluntary. Irresponsible borrowing practices, in which US consumers spend, spend, spend themselves into oblivion, accounts for the balance.

Consumers aren't changing their habits at all. They are continuing to binge only to be cut off cold turkey.

Instead of entering a slow deleveraging rehabilitation, something far more insidious is going on.

Consumers are accelerating spending until the charge off threshold at the lender is breached, and all credit is cut off, which results in a collapse of a creditor's FICO score, cutting him or her off completely from future (at least near term) credit access.

What this means for consumption is that we are building to an abrupt collapse of the consumer economy whereby a massive number of consumers will be saying goodbye to credit for a very long time.

With American unemployment still at record highs, and soon to take another leg higher, with paychecks continuing to decline, with excess capacity at record highs, with unemployment claims reaching their ceiling 2 year anniversary from the Lehman collapse, and with the general economy double dipping; the implications of this will be dire, as there will be no gradual decline.

Instead we are staring at a looming abrupt collapse.

The implications here for the economy, and the stock market, are profound.

Meanwhile in local real estate...

On the slow melt front, faithful reader, R.D., has been keeping tabs on 2699 Cambridge Street, MLS V850651 which is located just west of the PNE in Vancouver's eastside neighbourhood of Hastings/Sunrise.

Purchased in early September, 2009 for $838,000 the property was listed just last month (August, 2010) for $926,000. Presumably no additions, alterations nor upgrades were done to the property.

You've got to love optomism, don't you?

But rather than flip for a profit, it appears the buyer is headed to flip for a dip - a dip in equity.

The asking price was first reduced to $859,000 which means the buyer would be only breaking even after realtor fees, transfer fees and any lost/paid out interest - not to mention what could have been gained by investing elsewhere.

But that's not the end of this tale of woe. Now the asking price has been dropped to $826,000.

R.D. tells me he thinks $750,000 is reasonable level for this to drop to.

Seems even some Bears don't fully appreciate what's about to happen.

What about you? Are there any properties you have been watching that have been dropping their asking price? If yes, drop me an email and tell me about it.

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Tuesday, September 21, 2010

More on the Hyperinflation Debate

If you are not aware, this week the United States is pumping a massive amount of money into the markets (POMO) in an attempt to stimulate inflation. This is the number one reason why Gold/Silver have been taking off in value lately.

The Bank of International Settlements (BIS) has come out with a report comparing Japan with the United States as both embark on the same solution to the economic crisis (QE).

As Zero Hedge notes, the report show us that "Japan, even during its two-decade long deflationary process is far better equipped to handle the economic collapse that is unravelling for an entire generation of Japanese consumers. Which is why the Fed is now actively pumping $5 billion in the market every other day to stimulate inflation, and the stock market, as this is now the Keynesian system's Maginot line. The Fed can not allow mass perception of the the double dip to become entrenched as that would be the proverbial game over. What has worked in Japan for 20 years will fail miserably when applied in the US, simply because US consumers are in a far, far worse shape than their Japanese counterparts."

Coincidentally our friend, Gonzalo Lira has also come out with a post examining the Japan/US comparison. I'll summarize it here but I know some of you will want to read the full post so I invite you to click the link and go to Lira's blog.

Japan went through an equities and real estate boom during the 1980’s — a boom that was really a bubble. And like all bubbles, it eventually burst in 1990. Since then, Japan has been lost and the Japanese government has spent a fabulous amount of money for domestic stimulus that hasn’t helped at all. Japan is in full-on deflation—in every sense of the word.

Now a lot of people believe America is set to begin its own version of Japan’s Lost Decades and Lira argues it will be something completely different.

Lira notes the rationale for a similar path is simple and superficially persuasive:
  • Just like Japan in 1990, the United States went through a bubble in equities and real estate, which eventually popped in 2007–‘08. Since then — just like Japan — the U.S. has been experiencing deflation. Just like Japan, the U.S. now has zombie banks, the so-called “Too Big To Fail”. Just like the Japanese government, the U.S. government is spending - spending - spending, so as to prop up aggregate demand. The Federal Reserve — just like the Bank of Japan — is issuing enormous sums of money in order to prop up aggregate asset price levels — the Fed’s policies are so reminiscent of the BoJ’s money printing that Bernanke & Co. have borrowed the term outright: Quantitative easing.

    Everything screams Just Like Japan—right? So according to the “Japan Is Us” camp, 2010 through at least 2015 will be just like Japan between 1990 and 2010: Sluggish growth, stagnation — and most important of all, deflation, deflation, deflation.

    But there is one key difference that the Japan Is Us crowd conveniently ignore. They ignore it out of blindness, or incompetence, or—occasionally—out of malice. They ignore this key issue like the elephant in the room that’s gone and got drunk, and is now making a fool of himself: Balance of payments. Balance of payments (BOP) is the measure of a country’s total exchange with the rest of the world.

Lira notes that this 'current account' is the key metric, it's all about the trade surplus or deficit.

The U.S. current account has been negative for a long, long time (since 1973). Japan, on the other hand, has a current account surplus.

To finance this massive current account deficit, the U.S. has sold assets to the rest of the world, which are Treasury bonds. And as everyone knows, Treasuries might be called “assets” by the sophisticates, but they are really nothing more complicated than a loan. In other words, Americans and their government have gone into massive debt with the rest of the world, in order to finance all this spending.

Japan, meanwhile, has been carrying a current account surplus. Therefore, the Japanese government has been borrowing money not from overseas, but from its own citizen’s savings. All of the Japanese government’s stimulus spending has been paid for by the Japanese people.

This is the main difference between the United States and Japan and Lira argues it should be obvious — and ominous — what this difference means.

  • The U.S.— unlike Japan—cannot pay back its loans: Because the United States is broke. The Federal government is running deficits of around 10% of GDP. America as a whole has racked up $7.5 trillion in current account deficits over the last 25 years — over 50% of total GDP — with no end in sight.

    So the United States — unlike Japan — has been spending what it does not have. The U.S. — unlike Japan — depends on the rest of the world to lend it money to continue on this spending spree. Americans — unlike Japan — do not produce enough to self-finance its government’s stimulus programs.

    Therefore — unlike Japan — the United States will eventually be unable to pay the Treasury bonds it has issued. Therefore... there will be a collapse in the Treasury bond market (triggering) a panic in Treasuries (that) will mean a run up of commodities — which will bring about the death of the dollar, and hyperinflation in America.

    But even if you don’t subscribe to my hyperinflationary scenario — even if you think I’m full of shit on this issue (and plenty of sensible people think I’m full of it to the brim) — it’s obvious that Japan is not like the United States—it’s obvious to anyone who looks at the situation evenhandedly: The contrast in the two countries’ balance of payments is enough to show definitively and unequivocally that they are not the same.

    The source of the two countries’ funding is key: One produces its own stimulus from its current account surplus, while the other borrows it from abroad, adding more debt on top of its already existing debt. Therefore, one country’s spending and stimulus programs — Japan’s — are sustainable, while the other’s — America’s — is not. Which means that the mechanisms for this fiscal debt—sovereign bonds—are rock solid in Japan, but lethal in America.

Lira argues that you are seeing a promotion of the 'Japan Is Us' point of view and that is leading money managers to do the hard sell and lead their clients into Treasury bonds — because if you were in Japan in 1990, their sovereign bonds turned out to be the smartest investments in the long run.

But the U.S. is not Japan and US Treasuries have been under performing.

Lira suggests

  • "That’s why so many people keep insisting that Japan Is Us! - Japan Is Us! - Japan Is Us! They are selling their clients on something, or else trying to explain away their underperformance, by sheer force of personality — while ignoring the blindingly obvious fact that the U.S. is not Japan.

Which, of course, brings Lira to his foil in this debate, Mish Shedlock:

  • One prominent blogger in particular has been going insane, insisting day after day that Japan Is Us, to the point of psychosis — evidence to the contrary be damned. Every day, this blogger — Michael “Mish” Shedlock — bangs on the same old tired drum. Mr. Shedlock is affiliated with Sitka Pacific, whose performance leaves something to be desired. There are, apparently, a number of Sitka Pacific clients quite nervous about the direction of their investments. So it is reasonable to question whether Mr. Shedlock is ranting and raving how the U.S. is following the deflationary spiral that Japan did because he genuinely believes what he is saying, or because he is trying to convince someone — maybe his clients, maybe himself — of something that he knows in his bones might not be true.

    What is true is that anyone who has made bets that Japan Is Us will soon find out if they were wise bets, or foolish ones. The Treasury bubble is soon to burst — so we’ll know the fate of the American economy soon enough.

Back to you, Mish Shedlock.

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Video clip on Bubbles

I promised a colleague I would repost these video clips from Chris Martenson on asset bubbles, the pattern they follow and past historical bubbles. It comes in two parts...


And finally, for what it's worth...

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Monday, September 20, 2010

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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Sunday, September 19, 2010

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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Saturday, September 18, 2010

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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Friday, September 17, 2010

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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Email: village_whisperer@live.ca

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