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January 23, 2018 | Flip City

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.

Vancouver is so pooched. There are just two things locals should expect. Either houses cost $5 million each (at least) in a few years and the market seizes up – since nobody could buy and owners would fear selling – or it crashes and burns.

What Comrade John Horgan and his provincial government do in next month’s budget will set the scene. If the foreign tax is escalated or a spec tax brought in (both are likely), then combined with higher mortgage rates, the stress test and Van’s empty-head empty-houses levy, the market cannot survive.

Things are out of control. Speculation’s rampant once again. The latest Demographic ranking putting VYR just behind Hong Kong and Sydney is not so much a surprise as the way it got there. No city ever (according to the Frontier Centre for Public Policy) has turned into a morass of real estate horniness and new-buyer despair as fast as Vancouver. Little more than a decade ago the average house cost five times what the average family earned. Today that multiple is 12.6. To save a downpayment now takes a quarter century. Personal savings rates have been obliterated and, to add insult to injury, it snowed in November.

Prices are rising again, at about 400% the pace of wage gains. Those who think the premier can stop the escalation without collapsing the market aren’t paying attention. Hope, greed, expectation and the gaming instinct are in control. Local Mainland real estate is a futures market. People don’t care what anything costs, since it’ll surely be more valuable later. This is classic sentiment which precedes a reckoning.

By the way, that 12.6 number in Van compares with about 4 in Montreal, Calgary or Ottawa. In Atlantic Canada, it’s closer to 2. It’s not that real estate is inherently more valuable in one city than another, just that people living in places with lower numbers aren’t engaged in wild, buy-at-any-price activity. Blaming foreigner buyers is fashionable, of course, but the market is dominated by citizen-beavers who are overwhelmingly responsible for setting prices. So the only way to stop the frenzy is to turn market sentiment negative. To wit, replacing the lust for profits with a fear of losses.

Currently the Van market is being driven by the newbies. In the last year the price of a detached home climbed, on average, 7.9%. The price of condos, in comparison, exploded 26%. And look at the current sales-to-listings ratio. Incredible. For detacheds it’s a weak 14.4%, but for condos a robust 59.6%. The kids have been borrowing, and spending, as no generation before them. Unrepayable, elephantine, Trumpian debt is now the norm, and FOMO is back with a vengeance.

Lost on most people is the absurdity of their actions.

They are buying real estate when it has never cost more, and at rates destined to rise, using the kind of leverage which would make a stock investor hurl. Worse, these are typically first investments – ‘properties’ without any real property being snapped up by folks whose financial experience amounts to running a chequing account.

If Horgan is successful, dropping the market a modest amount – say, 25% – then tens of thousands of these kids are roadkill. Their mortgages will exceed the value of their concrete boxes. Selling will be impossible unless they can show up at closing with a cheque for the difference. Walking is a poor option, since condo owners are legally responsible for paying the lender back, complete with costs, and can only wriggle away through bankruptcy. In that case kiss your credit adios.

If sentiment were to turn negative amid such moister hardship, with sales and prices sharply reduced, what next? Would a new crop of potential buyers, shunted to the sidelines by crazed prices, swoop in an vultch listings? Hardly. The opposite. People are driven to buy when prices rise. When values plunge, they recoil. We’re herd animals, consistently and dependently doing those things in our own worst interests. Buy high, sell low. Covet what’s dear. Shun losers. If you need definitive proof, look at Bitcoin.

US housing analyst Josh Steiner had an interesting report on real estate, whacked-out buyers and Vancouver the other day. Canada’s ripe for a crash, he says.

“Imagine this: Rising interest rates and reduced foreign capital flows combine to push housing prices down in places like Vancouver. Leveraged players who own speculative homes start to liquidate their properties, pushing prices down further. Banks find themselves holding properties they neither need nor want. The dominoes begin to topple.”

And, wisely, he adds:

“Houses are illiquid because transactions occur infrequently and each property is unique. They aren’t like shares of stock. You can look at tax valuations and appraisals, but those are estimates. You can’t really know a house’s value until you try to sell it. Flying blind at 20X leverage is not the ideal way to learn about investing, but that’s how many Americans do it.”

Yup, and YVRers do it better. No American city, ever – even in the frothiest moments of the US housing crash that almost ate the world – saw average house prices rise to 12.7 times what people earned. Thus we can expect the trip back down to be, ah, memorable.

Over to you, Johnnie.

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January 23rd, 2018

Posted In: The Greater Fool

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