Friday, July 3, 2009

Making sense of the Housing numbers

Here are a few random thoughts that are passing through my brain....I am afraid it will be a bit long.

1) As I mentioned a few months ago, as soon as the Provincial election was over, the Liberals would start admitting that their budget forecasts were too rosy. Well here we are just over a month after the election and our premier is starting the process of fessing up.

As Vaughn Palmer wrote in one of the local papers.."Campbell is talking about holding the line on a relatively modest deficit at a time of economic decline, crashing revenues and escalating costs."

It will just be a matter of time before they are forced to start some major cuts or give up on any pretence of minor deficits, never mind balanced budgets.

2) OK so I got one thing right. What I didn't expect was the strength of the rally in assets. All assets. Oil, R.E. (in Canada) and Stocks. Given that we came back from the brink of financial Armageddon, by the tax-payer assuming huge swaths of liability, a bounce was likely. However what we got was more sustained than I had expected.

The RE Bear's case has always been that RE worldwide was grossly over-valued.

This was particularly the case in the US, where it was so over-leveraged and so much of it was held in speculative hands. However it stretched to the UK, Spain, the Baltics, Central America and of course Canada, especially YVR.

Everywhere else on the bubblesphere, prices have dropped, in many cases dramatically. In the US, the Case-Shiller housing index has dropped to late 2002 levels. In some parts of Europe where the bubble was most inflated, prices have dropped as much as 20% or more in the last year alone...

Meanwhile in Canada some cities like Montreal and Ottawa are at new highs, and Toronto is flat.

In YVR after the sudden huge drop in fall, we stabilised and have started to make a small recovery. We had a sizzling June for sales. How is that possible?

My reasoning is this....the crisis hit the US first as they had been the most irresponsible in lending. We were still doing OK as they started to collapse, due to several factors;

a) The usual lag between the US and Canada. We have contracts in place that have to be worked through.
b) Our lending was (comparatively) more responsible.
c) We were protected by the resource sector, even with the battering it took over the last 18 months.

As the US economy dropped, the Fed desperately cut rates and our rates followed down (after all we cannot afford to have any strength in the Canadian We also had Federal panic measures like the home renovation grants and various stimulus packages.

The result was that we had two separate economies.

The first were the folks getting laid off in manufacturing and forestry...and buying a house was the last thing on their mind.

Then there was the other 92% of the work force who were employed, still getting paid pretty well, and who saw the price of many things dropping - like gas and travel and cars -and then this wave of interest rate easing hits them.

The lower cost of borrowing allowed them to buy an extra 40% more home (30% from lower mortgage rates + 10% from lower prices). I have shown you in previous posts how the rate cuts made housing a lot more affordable, even without the price drops.

Who wouldn't jump at the chance to get on the housing band-wagon or to move up. (obviously not us bears :) )

It is no coincidence that the Government and head-office cities of Ottawa, Montreal and Toronto, where employees feel the most secure in keeping their jobs, had the most price gains, while the entrepreneurial cities of Calgary and Edmonton had price drops.

What now?

I think we are now in the calm that is the eye of the storm. That is when those who have not been affected breathe a sigh of relief and then get hit by the other side of the storm.

It is inconceivable to me that our major trading partner, the US is in such dire circumstances and we should get by relatively unscathed.

Remember Canada exports greater than 30 x more to the US than to China. Most of our trade with China is imports.

My Guess

I think we will soon have the second leg of the severe recession starting. I expect the markets and assets to roll over again. When? I think it could be anytime from now until early fall. As an economist once said.."You can ask me what or when, but not both!"

If so, I think that commodities will also roll over once again and it will be our turn in the barrel. The only problem is, we will have already fired all our more easing is possible, Federal and provincial debts are climbing rapidly and stimulus packages will be spent.

I expect the Provincial fiscal position to be a LOT worse this time next year and for the government to be looking at health and education (2/3rds of the budget) cut backs to make up for the Olympics and income hole.

RE is just another asset and is about as over-priced relative to income and purchasing power as ever, so IF the weakness that I expect starts anew, we should expect RE to roll-over in Fall and keep going down after the winter Olympics.

However I didn't expect the up-tick that started in March to last this long, so as always, take my opinions with a large bag of salt.


  1. Hope you all appreciated my hokey attempts at introducing graphics :)

  2. Why the VYR RE is so sticky? I think there are mainly three factors:

    1. Low interest rate.

    2. Resource lending practice.

    3. Fear of (hyper) inflation.

    With point 1, it makes the housing seems "affordable, to some extent. This gives the "priced-out" byers a "chance".

    With point 2, if the house price drops, the majority of the max-out owners can not even sell the house, even they want to. If the mortgage is more than the house worth, selling means to put money in - for the max-out owners, where can they find the extra dough? They can not easily walk away either, as the recourse mortgage lenders have the legal rights to go after their other assets. And if there is a foreclosure, the legal process will also last very long time. This all makes the market sticky on the downward direction.

    With point 3, when prople have cash at hand, they they will feel the money vaporized guickly as the governments printing money madly to save the bankers. This drives them to any safer investment. But what are the choices?

    Stock? Bubble already.
    Gold/Silver? Bubble already.
    GIC? Close to 0-return.

    So look around, RE seems still safer comparing to the other choices.

    Will YVR RE drop more? I believe so. How much and how fast? My guts feeling is not that much as US, and not that fast either.

  3. Out of curiosity, how much economic activity do you think the resource sector produces that actually stays in the province?

    I think you said it best a few weeks ago, fish10, when you noted that spot affordability has improved 30% since last year. That's huge and seems to me pretty obvious as the major reason for recent speculative trading.

    I disagree that RE is "safer" than the other choices. Any investment whose cash flows call for a 30-40% drop in prices to be competitive in the long term is not safe at all. That people view real estate as a safe investment shows how busy people are to not have time for learning basic financial acumen.

  4. I have recently met a lot of first time buyers as a function of my job, and they are all really exited and pleased by their purchase- its a nice feeling to lose the landload. Don't get me wrong, they are nice people living a dream.

    They also happen to be highly leveraged. Don't forget these FTB's are replacing previous owners who would have had more equity; and, therefore could withstand a greater depreciation of prices. And, even if the seller remains in the market, they will have bought up, again creating more leverage. As such, the unintendended consequence of the market bounce, is that it has created a lot more debt that can't go away. On the other hand, the recent appreciation could be gone by September.

    Furthermore, rents are comming down, lowering already inadequate yields, while allowing renters to save more. Saving more, what a strange concept.

    Bears can't expect a pychological shift in the expectations of buyers- they want their own homes. Risk is not a part of the thought process. Ever wonder why real estate didn't crash during the 80's until interest rates went up. Well, now you are finding out why. So, if Bill Good, Gordon Campbell, Bob Rennie, and your dad, tell you it is safe to enter the water- better grab that bathing-suit no matter what the cost.

    The really scarry part is that people owe a lot more money today than they did back then. Like the dude in the much qouted Staight article said "if interest rates go past 4% were done"- WTF? Obviously, quantifying risk is not one of his strengths.

    I'm certian that people who believe tha YVR dirt has hit bottom don't understand exactly what they are hypothesizing. Which is that YVR real estate will be twice the price of NYC and San Fransico, and more expensive than London. Would ant rational person think this is a sustainable condition?

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  6. ...
    Dosn't look like there is much of a bounce in the FV

    One day ago


    Nice house and better value than a (cheap) two bedroom leaky condo in Vancouver.

    CZ - you are right, there are few other options for investment dollars right, so many are going with what they know.

    However I also know a few holders of condos which are negative cash flow and are tough to rent out right now, getting a bit concerned about their jobs - but yet trying to hold on for now.

    Jesse- I have no idea what % stays. I know that natural gas royalties is our number one resource now and that has ben trashed causing the Prov Gov to repeatedly have to lower their income estimates.

  7. You guys got it all wrong. RE prices will hold in Vancouver for the simple reason that close to 1 in 3 houses is used as a grow up. This is so widespread beyond belief bit it is true. With two to three plants of marijuana your morgage is paid off each month, BC hydro wont notice the consumption and if the cops want to bust you they still must give 24h notice so you can safely remove your golden eggs. BC is THE place for a grow up.
    I am in the construction business for years and most people that buy houses as an investmebt property in 80% of the cases is for a grow up. It is easy and safe from prosecution in the small quantities and it pays the morgage itself. You need a house to do this. It is a 6billion trade in BC , much more than the construction business and the goverment has no intention in stopping it.
    Stop looking for complicated reasons to the real estate prices in Vancouver. We all know that considering the avearage family income in Vancouver, 95% of population cant afford to buy here, where is the money coming from then???? Who is buying those houses and why? Some fools will overstrecth and go deep in debt, but most houses are purchased for and paid off by themself, through grow ups, there you have your cash flow positive house!

  8. Grow-ops are being busted all over the place lately. They are being forced out of the Lower Mainland.

    "And many operators have simply located to other parts of the province – a problem Garis wants to see stopped."
    "In a letter to the deputy solicitor general for B.C., Garis details the issue.

    "Significant displacement of grow operations is occurring to other areas of the Lower Mainland (up five per cent), to Vancouver Island and the Gulf Islands (up 19 per cent) and the B.C. North (up seven per cent)." Garis wrote. "As for the 38 per cent fewer hydroponic outlets in the Lower Mainland, it would appear the largest displacement is to the Interior of B.C., which has seen a 23 per cent increase in hydroponic outlets.""

  9. Ah the grow show argument. Given the massive recession in the North American construction industry, I'm betting the margins on dope are under severe pressure.

    fish10, much of the employment in the resource sector is in exploration and capital expenditures. The maintenance of many of the existing sites is relatively small, save some of the more complex mining operations. The government takes some cut for royalties -- keeping many a civil servant employed -- but the spoils mostly go to the shareholders. Given BC's propensity for property investment and a significantly negative savings rate, I'm guessing most of those resource dividends are headed outside BC's borders.

  10. I am not talking about big plantation, but two to three plants will pay your monthly morgage, and this goes completely unnoticed without any consequences at all. You would not suspect, but most people are doing it, from blue to white collar workes, it is the new morgage helper... Stop looking for other explanation, there is none!

  11. Anonymous,

    IF that were the case, most renters would do it to, driving up the price of rent. That's not happening. Most landlords don't check their places on a regular basis (sometimes not at all).

  12. Anon,

    Even if that was true (1 in 3 houses growing weed) then who is buying all of this weed? I would find it unlikely that these people would be running it across the border themselves, so they basically have to sell it to people in vancouver. They either try to sell it on the street, which i doubt most average people would do, or the would sell it to their friends. Lets see if they grow enough weed to pay a mortgage, (lets say $2000 a month to be conservative) then they need to be selling an average of $1000 of weed to 2 other households, (since 1 in 3 houses is growing, only 2 in 3 houses would potentially be buying). You honestly believe that the average household spends $1000 on weed a month?

    Go spread your BS somewhere else.

  13. Yeah my guess is renters are doing it just as much as owners. It's an occupier's subsidy, not necessarily an owner's. Besides it merely siphons off money from other things. You can't sell without a buyer who will part with his hard-earned cash instead of using it for something else, like paying a higher rent to his landlord.

    Besides, most people would grow for personal consumption. Net income: close to zero. Also dope was around 10 years ago when prices were way lower. Next.

    I took a quick visual poll within a couple of blocks of my house. I figure about 10-15% of the places could be grow ops, the rest I've either been inside or are inhabited by middle-aged parents with kids or pensioners who are unlikely to be growing weed. Maybe I'm in the wrong neighbourhood.

  14. David,
    BC people are broke to buy it and consume for themself, are you kidding? All BC bud is exported south of the border and much renowned in Europe too. Yeah, finally we have our own worldwide recognized brand. The network of selling it is very simple, people will come amd take it to your house for cheaper price and you basically have not much to do with the mafia network in Vancouver whasoever. Things are more risky once you start trading big quantities, thats where all the big money is made, but this is not for the faint of heart. I am talking about getting 2000k a month, that is two plants you have to take care of and is done in a very wide scale.
    I dont think renters can do it, you have to be a house owner for obvious reasons. I am glad to listen to your explanation as to why we have such ridiculous high prices here when there is nothing to support them and the bubble has burst worldwide.

  15. jesse, the house next door to me has been a grow-up twice. Both times tenants. The landlord is an idiot and has had to spend a lot of money to bring the house back to legal occupancy.

    In this case, the owner has been hurt by the grow-ops, not helped. This was topped off by a stabbing a few months ago, tenants that keep lighting camp fires in the back yard and city orders to keep the lot upkept. Police, fire dept and city hall all have their eyes on him. All I have to do is pick up the phone for whatever the latest BS is, and someone is knocking on the door in minutes :) I'm not letting the sleazebag off the hook for anything.

  16. "I don't think renters can do it, you have to be a house owner for obvious reasons."

    You just proved you don't know anything. :P

  17. Grow Ops are more popular than backyard gardens in Victoria. That money has to go somewhere.

    Might not be the only thing propping up the economy, but it's a significant factor.

  18. I totally agree that extensive grow op's are propping up the regions insane real estate prices. I personally know a few professional types with the "invisible tenant" subsidizing the monthly mortgage. I don't even live in this world, so I can only imagine how extensive it is. 1 in 3 houses as previously suggested? I doubt it, but it is huge, none the less.

  19. 2 or 3 plants won't usually pay your mortgage. This is the west coast: there's a lot of competition, right? Plus, gangs on the supply lines. Maybe if you had a rich patron or 3; the exception, not the rule.

    I say this with a bit of knowledge - I grew up around hippies and know lots of my parent's gen with a plant or two and the whole hydroponic setup and trading seeds like they were heritage tomatoes. Pot's not my thing, but I find the plant or two folks rather like the home brew folks: the whole thing varies rather wildly. Imagine just trying to home brew small batches and then actually make any pocket money off it; some, maybe, but not many.

    And trafficking is serious. Trafficking with 2 plants sounds like a good way to make no money and have either cops or gangs getting curious.

    Plus, you want any yield at all, the cops know that you don't have tomatoes in your wee hydroponic/lights/mist setup, even if you move the plants along. A pot plant just growing - not being coaxed with setup - isn't going to yield very much.

    David's analysis of home grow is right. Although indeed BC Bud is shipped all over, it's not some pothead with a couple of plants; the gangs aren't going to deal with a bunch of piddly 1 pound suppliers, and it's not the 60s home grow crowd going to have worldwide distribution. It's all about the distribution, right? And it's not like $3,000/lb on the street is what a gang's going to pay a producer.

    If you stand back and think of it as a business (which it is for the gangs), having cottage industry producers is just going to be inefficient. So they'll rent a house and grow op in it, not 2, but hundreds.

    In other words, as a business model, 2 plants in every third house doesn't really work.

  20. wake up guys, read the economist's article above. It is a 7billion industry in BC alone. That is 7 billion !!!! where is that money going? most bc bud is exported. There are several layers in the hierarchy of bc bud, from the the little guy in his house with his two plants to the middleman that collects it for a small profit margin and so on up the pyramid. The risk fr the little guy with the morgage helper is close to zero. Gang problems start way up in the scale of trade and that invlolves big quantities and money and risk. Just like everywhere else, more risk you wanna take more money you will make. There is no other plausible explanation to real estate prices in BC, stop looking. here is again the economist's article:
    Maybe we should ask ourself, why does not the goverment do anything about it? 7billion trade, that is a lot of money, and sure a lot of lobbying too, at the highest goverment level....

  21. As I said before, the drug trade was around 10 years ago even when house prices were way lower. Anon 12:52AM said it best. A small-time operation doesn't really net all that much and I severely doubt it's as widespread as people want to think.

    BC's GDP is around $125 Billion. I assume the $7BB is street value, right? What's the wholesale price? Maybe drugs contribute 2-3% at absolute best and I bet a lot of it never gets injected directly into the provincial economy. Oh and much of those taxes you pay are wasted fighting the drug trade which is a net negative for the province.

  22. OK folks I think we are getting into the nuts of bolts of grow ops a little too much here :)

    In any case pot must be the most discretionary of all spending and hopefully with the recession we will have a drop in demand.


    I have never seen so much divergence in opinions on where we are economically.

    I follow two respected technical analysts on stocks. One says we are due for new lows, and the other that we have started a new bull market.

    Then you have inflation expectations and once again, you can read excellent analysis on how we are headed for rampant inflation and others saying that we have more deflation ahead.

    Remember the US has had significant housing, cars, stocks and wages for the last couple of years.

    We have had deflation in most items except housing.

  23. I wonder if Anon is the mastermind behind the BC pot industry. Like the Bob Rennie of organized crime.

    He says "ok guys just grow 2 or 3 plants and your mortgage will be paid! I will take the pot and sell it over seas somehow!"

    Rennie says "Just pay $50000 now and you will have a condo worth more than you paid for it in 2 years!"

    They both sound like equally crazy schemes to me.

    (these are of course, entirely made up and not actual quotations)

    Even if everything Anon says is true, how would talking to the mortgage broker go? Like this I suppose...

    Buyer: "Hi, I need a mortgage for an $800 000 house, it has a big basement which is very important to me."

    Broker: "Ok and what is your annual income?"

    Buyer: "I work at 7/11 and make $13 000 a year, but I have a great work from home business which I have no documentation and I am sure can pay the mortgage with that."

    Broker: "Sounds great, sign here and I will write you a cheque!"

    Hmmm I guess he is right after all.

  24. David,
    it aint much differnet than what you say. You sound like someone in the know...really!

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