Saturday, January 30, 2010

My last post till late Feb

Ok folks - you have heard me state several times that a rebound in prices past the highs of late 2007/early 2008 would put our 'bubble bursting' graph into doubt. We are there, however... seems like we may have a little reprieve. My technical analysis friends, tell me that there is such a thing as a divergent high.

First you get a 'momentum high' as prices get driven up-wards by panic buying, then you get a scary drop, followed by another zoom up- but this time it is a 'divergent high'. Which means that while prices move up again, things don't smell as fresh.

The divergent high usually happens as the powers-that-be try to sustain the bubble by what-ever means necessary. It is driven by late-comers, bears throwing in the towel and the last few buyers left behind.

In stock terms that would mean the second high comes with lower volume, and just a few star stocks participate in the final climb up, while the majority were flat.

In real estate terms, we could argue that we have just had the divergent high.

1) Much lower list/sales than the previous high. check.

2) Limited participation. Check. We have the West-side making new highs (how's median prices of $1.78 Million sound?)- but the Valley, Okanagan and even East and North Van are stagnant or dropping:

So the rebound has been much more narrow. The OK is nowhere near it's all time highs. But Down-town Vancouver is pretty close, even though there is more inventory and lower list/sales that the previous high. A clear divergence.

Daisy chains

Vancouver, in fact Canada as a whole, is one of the few areas in the world, along with China were RE prices have been on a continued up-swing despite the recent credit events.

You have read me state several times, that many assets seem to be linked at present.

Gold, oil, stocks, commodities, non-US RE have all moved up in lock-step. The driving force has not been increased use, or a sudden jump in population but zero interest rates and a return to speculation.

The zero interest rates are not for borrowers BTW, who still pay 4-7%, but for savers who get next to nothing. The goal is very simple, to allow banks to mint money and repair their balance sheets (6% - 0% = 6% which is a very large spread historically), and to force savers out of money market funds and back into more speculative investments or better still- to just spend the money and keep the consumption orgy going strong. It has worked.

Though commodities such as copper have seen a drop in use and large increase in storage, they have been bid up close to recent highs. Even Chinese pig farmers have been buying up stocks-piles of commodities as investments:

Ok, so what does this have to do with Vancouver RE. Well we are linked in a daisy chain of assets to these speculators, since we have one of the most speculative RE markets in the world. Nothing compared to China which has seen 40-60% annual rises in some of it's major cities. Some say that bubble is about to burst too:

We have started to see risk-fear returning to the stockmarket, and when it happens, things drop quickly. Look at oil or gold or our own TSE -a 9% drop in just two weeks:$TSE&p=D&b=5&g=0&id=p60710887103

So what does this all mean. Not a lot :)

It means that we should look outside Vancouver to see how our RE will fare. We need to watch the Chinese stock market, the S and P, the TSE , gold and oil. They are all moving together and a slide in one is likely to auger a drop in the others.

More than that is impossible to forecast. Why? Because we do not have free markets anymore. If a fat-figered trader at a major bank losses money on an illegal trade the market will drop hard, but if the government decides the tax-payer will pick up the tab, then speculation returns very quickly.

It happened in France, when one trader lost an astounding $7 Billion and brought bank stocks down 6% world-wide - the US FED quickly cut rates and the French Government arranged emergency loans and back-stops.été_Générale_trading_loss_incident

In the US, the government bailed out AIG to the tune $200 Billion for foolish, negligent and perhaps criminal (an insurance company should not sell more policies than it can cover) trading.

The bubble has to be inflated at all costs, even mortgaging the future to do so.

The Owe-limp-pix

You all know I was 100% against this wasteful, unnecessary, corporate, nationalistic shin-dig. Why did the proponents want the games again?:

1) To pump RE even more and enrich developers
2) To inconvenience locals, many of whom are fleeing the town.
3) To leave us a legacy of debt.
4) To allow our City councillors to try and negotiate with Wall Street sharks for money and get fleeced.
5) To attract more low and semi-skilled jobs at a time of boom from RE construction, digging more holes and filling them with concrete so that we can have a complete collapse after the Olympics and have to retrain all these people for more sustainable careers.

Ok now that we have that out of the way, I have to say I want the games to be a success.

Unlike some permanently-negative bears, I want to see the games go as well as possible, with as little added costs for bringing in snow by helicopters. Oh and I do want us to win Hockey gold (coz it is our game) and hope we don't have riots if we do or don't.

Why? Because the more it costs, the more we are all - buyers and sellers, Vancouverites and Canadians, going to be on the hook for it and have less money for daycares, and schools and affordable housing which are things worth going into debt over.

And we have to keep those nickles handy for the CHMC, if RE turns sour, or maybe one of our banks gets carried away with gambling, sorry I mean trading and needs help in the future.

Have a safe and healthy Olympics and I will see you at the other end.

Wednesday, January 20, 2010

Thanks to vancouvercondoinfo for the above graph.
As regular readers know, I have posted the typical 'bubble graph' several times in the blog and until the end of 2009, there was still a strong possibility that Vancouver was following the path of Dutch Tulips and the Dot-com-laden NASDAQ of the late 90's.
However as you can see from the graph detached has made a new high in average price, which puts this model under some stress. All is not lost...yet. But it is getting close to the wire.
Just because we think something SHOULD correct and clearly is over-priced, doesn't mean it will oblige. There is often a confounding factor that we did not account for that could prolong the bubble or push it to higher heights. Remember Japan had a RE bubble that went on for 15 years without a pause and has been on an equally long down-ward path.
Lets look at the graph above once more.
The Boom-bust sequence often follows a predictable course:
First there is a trend change which is subtle at first and then picks up momentum and feeds on itself.
You can see in this graph that 2001 marked that departure. Prices rise at an even steeper trajectory and bears talk of 'bubbles' and 'unsustainability'. Each minor correction is hailed by bears as the beginning of the major drop, each bounce back is a vindication for bulls that the move up will keep going. People move from the bears to the bulls campand are quickly rewarded by an increase in equity and feel smart for making the jump.
Those who don't change camps, become ever more dejected and bitter towards all the factors that they believe are keeping the bubble inflated...government policies, rich immigrants, tax breaks, realtors, pumpers, lax bank lending etc They feel and are made to feel like losers.
The peak is marked by absolute recklessness as people throw money at the asset. That would be late 2007/2008. It is the last gasp of the main run-up.
Then we have a drop, which was quite rapid and frightening. Bears are jubilant.
There is usually a retest up to the highs. The late-comers see their opportunity, the vested interests try their best to keep the bubble inflated and up goes the asset again.
Bears who didn't buy are ready to leave town or are getting divorced by their spouces :)
However the mood is different than the first peak. It is not as reckless. The recent memory of the drop is still in people's minds and their is anxiety in both camps. I would say this is the part of the graph where there is the most anxiety and worry.
Both sides worry about which route the asset will take. Despite all the bravado from both sides, no one knows, or can say with conviction which way the graph will go.
Buyers, especially recent ones, will turn on any bears who may suggest that their buy was at the top, where-as bears are looking for some indication that they didn't miss the last chance to gas up for 200 miles.
We are at this point now.
I note that the UK was in a similar position and thanks to herculean efforts from the government to pump up the asset and bail out the speculators, the price of housing has rebounded but even they didn't get to new highs as we have in Canada:
Ironically we felt proud in Canada that we had more sound lending and did not end up with the same problems as the US. Then we increased the CHMC limits at the all-time lows of rates and at the all-time highs of prices. To paraphrase repeat the same actions that failed before and expect them to succeed is true stupidity.

The next few months will make things a lot clearer.

Sunday, January 17, 2010

Somehow I missed this....

VREA's prediction of how RE could could unfold in the near future:

This is more or less how I see it unfolding too. However I also thought that the bounce in 2009 (caused by lower prices and lower interest rates and the CMHC) would not cause a rebound to new highs, which now seems to be the case.

It seems our RE market is more highly correlated with that of China and HK than with the US, who would have thought it.

The ironic thing though is, while the average price has hit new highs, we are at a higher MOI than we were when we were last at these lofty levels. The market also feels a lot less tight, with more listings coming every day, and less frenzy in the market (except at the end of December).

But as I said before, until we get the Olympics out of the way, we wont know what to make of the numbers.

Thursday, January 14, 2010

Apartment rents drop 9.4% from a year ago!!

A huge number!

Ok this is New York, we are talking about. Manhattan to be precise, which as we know, is not as world class as Vancouver and has lots of land.

Actually the drop is probably much higher, as landlords are giving big incentives for leases, such as two months free rent for a 14 month lease. That is equivilent to another 10%+ drop!:

Of course this could never happen in Vancouver. BTW I tried looking up the Vancouver Vacancy rate, but had a hard time. Vacancy rates have increased across Canada with increased home ownership, by 1% according to the CMHC, but I couldn't find precise numbers for Olympicville.

Saturday, January 9, 2010

I'm back

Hope everyone had an excellent break.

The RE numbers have continued to be bullish. The end of last year was a steady and panicky stream of buys, near asking, in many Vancouver areas.

The December stats show a new high for average prices:

There are not many places in the world, one year after the credit crisis, which show new all time highs in their prices..maybe Hong Kong and Shanghai- due to the Chinese Government stimulus, a few smaller European countries like Norway, and of course Canada.

If you had told me a year ago, in the midst of the near financial collapse, that in one year the following events would have happened; Dubai would have nearly defaulted, Greece, Spain and Ireland would have their debt downgraded, one hundred US banks would be closed due to insolvency, the unemployment rate in the US and Europe would be over 10%, we would have 8.5% unemployment in Canada and move up to 8.4% in BC (just before the Olympics and all) AND residential RE would have moved back to all time highs, I would have thought the two scenarios impossible to co-exist.

But yet it happened.

Of course not everywhere has bounced right back to new highs. In Kelowna, where I just returned from, there was a much more muted rebound:

In Victoria, a strong sales number this year, did not prevent the first year on year decline in average prices (that's 2009 compared with 2008) since 1998.

Fraser Valley had a rebound from last year, but not new highs.

Places which deal with the real economy, ie making and mining things, like Prince George, have seen drops in both sales and prices from even 2008:

So will the strength move out again to the rest of the province, or will the boom die out in Vancouver too.

Now we have 2010 to deal with. Here are some themes:

1) So far we have seen a little flood of listings, with less sales. However the list prices are high and in some places, we are back to 'wishful pricing'. We will have to take any stats coming between now and the Olympics with a huge grain of salt. No one knows what will happen in the next 30 days and then we have 30 days of probably very little action and then the market will reveal itself in all it's glory. After the Olympics, I hope to post the weeks of inventory again.

2) Flaherty the Federal Finance Minister - who is no coward when it comes to dealing with thorny issues- remember he got rid of the tax-free trusts- is finally making some noise about the bloated house prices and the problems that this could cause. How this jives with the expansion of the CHMC's lending capacity is beyond me. It's like pouring gas on a fire, and then wondering why the flames are leaping up.

Once again I say = aiding and abetting low-income or even high-income folks to get into over-priced houses, with high leverage mortgages, while interest rates are at all time lows and prices are at all time highs, and transferring that risk from the borrowers and the banks, to tax-payers is stupidly negligent at the least. Especially as we have just watched the failure of this very same policy in the US.
This will NOT end well.

Governments should encourage affordable food and housing and healthcare.

They should not enrich one group (owners and developers) by helping others, who cannot afford it, pay inflated prices for an asset.

Anyhow, if Flaherty is serious, then we may see some of the more reckless activity taken out of lending.

3) Is this the end of the recession? What recession? A couple of points more on unemployment- it didn't feel too bad here in BC. For that we have to thank the Chinese Governments huge stimulus package, the US government and UK governments back-stopping their willfully foolish banks (and AIG) to the tune of One Trillion Dollars and zero interest rates.

The net result was a stabilisation of banking and a re ignition of speculation. Gold, Commodities, stocks and RE- anything but cash- which was king a year ago but now is a pauper.

Of course we are very far from being out of the woods yet. The governments cannot keep writing checks and eventually the huge deficits will have to be acknowledged. When that happens, if the private sector has not recovered enough, part 2 of the recession starts. On the other if we get an economy on fire again, then interest rates will spike up in anticipation of inflation, and squeeze borrowers (of all types).

So the policy makers have to try and engineer a smooth recovery, without too much inflation, and without a double dip. Good luck to them. Their play book says = if a bubble deflates, blow up another one.

I think there is any point trying to predict any of this. It is too much of a crap shoot. We have had many respected analysts from Robert Schiller to Mike Shedlock saying Vancouver is grossly over-priced and a correction is due. However, apart from the frightened drop late 2008 and early 2009, we have had remarkable resilience in prices.
We will have to look at the tea-leaves after the Olympics, an event which will inconvenience the locals, cost us a fortune to stage and police- but we can at least be reassured that our politicians can have some well deserved time in the international spot-light and some contractors and developers have made nice fortunes out of it.