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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

April 4, 2016 | The Imbalance

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

 

It only take s day or two of reading comments here to conclude Vancouver people are not like the rest of us. Talking to them about finding balance and diversification in their lives is like arguing with a disease. Logic ain’t got a chance when it’s fighting chemistry.

The sheer magnitude of YVR’s hormone imbalance was in evidence again Monday when local realtors trotted out the latest numbers. Record sales for March, and a price increase that was ten times the inflation rate. Right. Move along. Nothing to see here.

The key point is that Vancouver now has a 44-day supply of houses, down sharply from just a month ago. This is getting close to that of the GTA, which has three times the number of people and an actual economy. Plus subways. And massive, car-laden expressways carving their way through silly residential areas and wasteful green space.

There were 5,173 sales last month in a region with a population of less than two and a half million people. Compare that to fewer than 8,000 sales in the GTA, where six million souls live. Deals in YVR in March were 56% above the 10-year average for the month. It’s easy to see Vancouver is obsessed even before you start talking about the value of the trades.

The real estate board Frankenumber jumped more than 23% to $815,000, and the average detached house price is now sitting at $1.78 million. More than anything else, it seems that supply and demand are tipping this whole thing into uncharted waters. With just over 7,300 properties on the market, active listings have plunged by 40% from year-ago levels. At the same time, the provincial government has been pumping houses with some serious anti-flipping rhetoric from the premier and a fat holiday on land tax for first-time buyers. This is also the place, remember, where scads of people can put off paying their property taxes and home owner grants are available for people who lives in houses worth as much as $1.2 million. Seriously.

Well, add in a cheap-money policy from the Bank of Canada, plus the federal Home Buyer’s plan, first-time buyer tax credits, taxpayer-funded mortgage insurance to keep rates low for even high-risk borrowers, plus media-fed terror that foreigners are scooping houses and you get this outcome: homes people can’t afford.

See for yourself. Here is what’s become one of the most famous housing bubble charts in the world:

1VAN CHART

As I detailed in a pathetic blog post recently, when supply and demand are out of whack, prices bloat. Risk builds. Smart people sell. These days the supply of new listings has plunged as valuations plump – for classic reasons. (a) Homeowners relish the wealth effect of thinking they’re sitting on a gold mine that every weather-weary Torontonian or Guangdong industrialist craves, which will go up forever, and (b) they understand they could never afford to buy their own houses. So if they sold, where would they go? In a rapidly rising market logic tells us it makes sense to cash in your chips and harvest the taxless capital gain. And move to a normal place. But (as I said) logic is in short supply at the moment.

Conversely, when prices fall (like in Calgary, or Halifax), the number of listings rises – since real estate is seen as a dodgy investment vehicle. More emotion. It keeps people from selling when they should or buying when it’s affordable.

The reasons why Vancouver is parabolic, and now infecting the bewildered burbs surrounding it, is largely irrelevant. The debate on this site about foreign buyers versus local horniness is moot. No government will ban offshore buyers, tax them into oblivion or otherwise erect walls to keep the locals safe. The damage is done. Mortgage debt’s off the chart. Savings have been plowed into houses. Basement suites are ubiquitous. A whole city has embraced a one-asset strategy. You need only look at the chart above to reach two conclusions. It cannot last. And the higher the line snakes, the more precipitously it could fall.

If Vancouver real estate were a stock, puts would be everywhere. The pros would be shoveling it as fast as possible into the hands of newbie investors. Risk would be coming off the table, since the eventual outcome appears certain. Regulators would be doing everything possible to blunt the speculative advance. Owners with windfall gains would be jumping off, looking for the next dog to ride.

But Van people are not like the rest of us. Infected.

Postscript:

This just arrived from blog dog Elaine. Apparently there are pockets of actual humans still alive in corners of the city…

“Just wanted to share my price to rent ratio with you here in Vancouver. We rent a solid 1950s(updated) bungalow for  $2100 a month (yes the whole house). Very similar bung down the street just sold for (you’d better sit down), $1,620,000 (300kish over ask). So our price to rent ratio is ….63!

“Prices like this, we’ll never own a house in YVR (and who cares?). I will cry my way to the bank. We are perfectly happy enjoying the yard, garden and walk to the store. No killer commute from the burbs. Space for the kids. Meanwhile friends are committing financial suicide by taking on huge mortgages for tiny townhouses or condos they will soon outgrow. Why bother? As long as landlord doesn’t sell (could happen but I don’t see a shortage of places to rent in our price range) we’ll be ok sans homeownership. We can always leave in retirement and buy somewhere sane with cash, if prices don’t correct (they will). I have no worries. Just feel sad for young families committing themselves to a lifetime of financial pain, at these absurd prices. Love the blog.”

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April 4th, 2016

Posted In: The Greater Fool

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