Saturday, November 20, 2010

A quick review...

Sorry about the sparsity of posts, but I have been very busy with work and there hasn't been much to say about the RE market.

In fact I have been making good money at work, enough in the last month for the down-payment on the median house! The only problem is the house is here.

Oh well. Rather be here than there.

So the time has come for some introspection. Have us bears been dead wrong? Well for a number of years we were - truth be told. Then we were VERY right late 2008 and early 2009, as the financial system in the US and Europe collapsed due to the RE bubble bursting.

However our drop was very short-lived. This was due to 'emergency' 0% rates and actions by our Federal Government to put in place the same things that collapsed the US:

1) Very long mortgages
2) Very lax lending
3) Pumping up the CMHC (read Freddie and Fannie)
4) Keeping rates too low for too long

Our local economy was also saved from the catastrophe going on the US, by a resurgent China which brought buyers for all things Canadian (thank goodness) from Lumber to Oil to Uranium to...well RE.

We have, as discussed on Larry's blog, many wealthy people in this city and a lot of them make their money right here. People for who $2.5 Million for a home makes perfect sense.

So we bounced back and our bounce has now faltered. Sales are way down, but then so are listings so that we are in a bit of a stalemate and sellers who can't get their price are pulling their stuff off the market and some buyers are giving up and offering good bids.

There has certainly been an up-swing in the market recently, though I would have to say that this up-swing is mostly in the sought after areas. The further you get from down-town Vancouver the more of a buyer's market it is. Take a look at the price reductions in the OK for an example.

In some areas things are sizzling and some speculators took advantage of the slow down in Summer to buy and are now trying to flip it immediately. One for a $200K profit in one month!

Of course we have no laws to restrict flipping or to penalize it.

So a speculator can buy, leave empty and then wait for a desperate buyer to come along or just leave it empty. After selling they will pay tax at capital gains levels - assuming they declare it and do in fact submit a tax return. This will be after deducting agents fees, any 'costs' , and interest and management fees etc. In comparison joe-blow working in a factory making something will be paying a higher rate of tax with very little deductions.

In Canada RE speculation which causes public harm is not a big deal. Our politicians couldn't care less. In fact they don't care about speculation at all! Eg....

1) Look at gas prices. How come all gas companies sell within a few cents of each other. Their oil comes from 100 different sources- some have cheap locked in contracts with producers- others are buying on the spot market. Yet they all sell at the same price..huh!

How is that possible? Wheat prices go up and down, yet bakers will sell similar bread for different prices, why don't oil companies. Why are they allowed to set such close prices.

2) Media. The government has allowed a few monsters like Global to gobble up all newspapers and lots of TV stations and that's OK. Would it be ok if Jim Pattison owned 80% of the supermarkets in town or Shopper's owned 80% of the pharmacies...of course not.

Canada is the speculators best friend and no where is this best demonstrated than the laissez faire attitude we have to RE speculation.


Back to the market. Is this a little breather before we head up again or are we about to change course. This one is hard to call.

The Bank of Canada stopped with the rate hikes at the first whiff of 'double dip' in the US and Carney went back into his bunker- though still whining about Canadian debt levels (but doing zero about it except whining) and the US Fed is back to buying it's own debt..huh!? Yup that's right buying it's debt, and the Chinese are caught between worrying about over-heating and worrying over the youth who may not be happy if their material aspirations are not met.

All these will play out into RE.

In 2007 I know we would get a big correction.
It came late 2008/early 2009.

In Spring 2009 I mentioned that with 15% drops and with 30% lower carrying costs we may have had the 40% drop I was anticipating and some people would probably start buying.
They did and the market went ramping up again.

We have now accounted completely for the drop in interest rates, so that RE is just as unaffordable as 2007.

Frankly speaking I have no idea what will happen next. Maybe we get a commodity superboom which drives prices. Maybe natural gas prices shoot up and eradicate our Provincial deficit, or maybe we just stagnate here until the rest of the world recovers and off we go again.

Or maybe we change course....