Buoyant real-estate market helps Vancouverites avoid reality of recession

Post by Daniel Fontaine in

21 comments

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Thousands of Vancouverites have become instant millionaires - at least on paper

Earlier this week, we experienced the second major meltdown of world stock markets since 2008. It’s estimated that trillions of dollars worth of assets evaporated overnight.

Yet, for many of us living in Vancouver, all this talk of economic malaise still seems rather foreign to us. That’s because the real-estate market has transformed thousands of local homeowners into instant millionaires – at least on paper.

Despite all of this wealth generation, is it only a matter of time before what’s impacting other economies comes crashing down on our doorsteps? If you want to see what our future might look like one day, I’d suggest you take a glance at Phoenix, Arizona.

Only a few years ago, Phoenix’s population was booming and it was one of the fastest growing cities in North America. Housing prices were climbing year after year and there seemed to be no limit to its growth. Then, in 2008, the global economic meltdown hit Arizona’s capital city really hard. Three years later, it has yet to recover.

I was just in the American southwest last week and got a first-hand look at what life is like in a new era of foreclosures and business bankruptcies. I can report it doesn’t look pretty.

But, if you’re a Canadian looking to purchase property down there, consider yourself in the driver’s seat.

Last month, our family was able to purchase a nice two-bedroom condominium in a gated lakeside community for just over $60K. A few years ago that unit was selling for over $170K. Now, if that same condo were for sale in Vancouver, it would easily fetch at least $500K.

Although most economists argue Vancouver isn’t on the verge of a housing bubble, just imagine what would happen if housing prices suddenly dropped by 15-20 per cent. A lot of Vancouverites would owe more on their home than it’s worth. Does this sound familiar?

If you want to see what a moribund economy looks like, just visit home improvement store Lowe’s on a Saturday morning. At one point, staff actually outnumbered customers by a 2-1 margin. Now contrast that to the lineups of customers found at Metro Vancouver Home Depots on any given weekend. What emerges is a tale of two very different cities.

Unless you’ve traveled outside of Vancouver lately, it’s hard to fully appreciate how hard some economies have been hit by the recession.

And if you don’t think it could ever happen here, you’d best think again.

- Post by Daniel. This column first appeared in 24 Hours Vancouver on Wednesday, August 10th. You can follow us on Twitter @CityCaucus. Or you can "like" us on Facebook at Facebook.com/CityCaucus.

21 Comments

Vancouver will be in for an awakening and there will be many people who said I told you so. Economist Garth Turner has a daily blog pretty much written entirely on the topic.

In my opinion we won't see anything like the US -50% plus, but 15%-25% will hurt a lot of people. When you put it into perceptive a $1,000,000 home's value dropping to $750,000 or a $400,000 condo becoming a $300,000 condo.

The future will be interesting.

I think most economists ARE predicting a correction in Vancouver..,some by as much as 25%...wait for it...it's coming

This articles ignores the 'economic malaise" that has hit the other thousands of Vancouverites that, for the last 10 years, have seen their hopes of home ownership extinguished. That is what a moribund economy looks like to us.

I'm tired of this spin that high home prices are great and a drop in home prices would be bad. It's a cruel, perverse viewpoint.

We should all hope that home prices come down so that young Vancouverites can afford to own a home and spend their money on other things.

Which economists "argue Vancouver isn’t on the verge of a housing bubble"? I want to short the banks they work for. We are clearly in the midst of, not on the verge of, an asset bubble. I am more pessimistic than Vincent, and base my own models on the risk of a 50% decrease for conods and a 30% decrease for single family houses.

On the other hand, the future for Vancouver is a lot better than for Phoenix or any of the sunbelt cities for two simple reasons - we have water, we have access to resources, especially food and sea food. Long-term I am very bullish on Vancouver and its potential to reinvent itself. This would include the greening of our resource industries, attrating a diverse annd multicultural talent base, and the ability to create and pool local wealth and reinvest locally. Short-term though, housing prices are making it very diffiuclt to attract new talent to Vancouver and a drop in housing prices would be a good thing for the economy if it is well managed. I would like to see Vision and the NPA get explicit on how they view housing prices and how they would manage a decline.

Buying in Vancouver might be expensive, but buying in Arizona is insane. It's a desert! Here's but one of dozens of studies showing the impact that groundwater extraction has had on the geology of Arizona, and it ain't getting better.

http://www.azgs.az.gov/Resources/CR-07-C_Dec07.pdf

There are many ghost suburbs out there, golf courses run dry--it's insanity.

Is it you speaking Steven, or the clairvoyant turned market speculator and "green specialist" Joel Solomon?
"greening of our resource industries" LMAO is cocky talk, nothing clear, real or based on something stronger than the toilet paper is written on. So you know what? Go fish... Pacific wild salmon though.

Since when is a 19% (peak to trough) correction in the market a "major meltdown"?

I couldn't agree more about the real estate side but I find it comical how everyone, journalists and commentators included, suddenly turn into to market/economic experts any time the markets are making headlines.

When a market rises almost 100% from the 2008/09 lows and then has a 19% decline....it's hardly a meltdown.

It's called a correction (at this stage).
Corrections of 10-20% have happened about 18 times in the last 50 years.

Part of the problem for investors is that, much like children, they want everything and they want it now. They feel entitled to it. When it doesn't play out how they want, when they want, they go in to melodrama and get sucked into the media "story".

When you call it "major meltdown" you show a total lack of historical perspective.

2008-09 is certainly a major meltdown (50% over 6 months)

2000-2002 is a major meltdown (50% of 2.5 years)

1987 is a major meltdown (23% in ONE DAY!)

1974-75 was a major meltdown (45% over 8 months).

19% (a big chunk of which was recovered, for now, by weeks end) is only a major meltdown if we are all a bunch of spoiled armchair quarterbacks.

So the next time you hear "there's so much uncertainty", ask yourself this;

When have things EVER not been uncertain?

The fundamentals of this market are very weak. Derivative trading is even more widespread than in 2008. The signature last week was unprecedented volatility-translation instability. It's not a good thing and it's far from over.

Gerry,
Any "historical" comparisons that lack the ability, or the desire, to look for situations other than 2008 are not historical.

I call them "peripheral".

Imagine the stock market at a current point in time as a dot in the middle of a circle as point A. Imagine "all possible outcomes" as points on the circle.

99/100 people are concluding that we are likely headed from point A to the point on the circle that represents 2008.

As a student of market psychology and history, I can assure that this is what happens all of the time. Investors are drawn to that which is in their recent memory, oblivious of all other history and outcomes.

It's what they can see without actually having to look around....kind of like sheep.

When 99/100 are convinced of something when it comes to stock markets...rest assured that the more overwhelming the majority, the more likely they will be dead wrong in the long term.

If you find yourself to be someone who only follows markets when things are "loud", do you really think that you are going to magically wake up and predict the future.

Humans have been trying to do that for 400 years. That's why so few people are successful as investors...they wake up thinking they are Kreskin 2 to 3 times a decade.

That's the only thing that is predictable.

As a good friend of mine in the markets says,

"If you can't find something to be very worried about.....that's when you need to be worried."

FYI:

Endswell/Renewal/Tides (all one in the same, just a paperwork/money shuffle) - already involved in so called 'green' real estate:

http://www.renewalpartners.com/investments/social-purpose-real-estate

Summary: The violent see-saw
continued with another day of 4%
moves in many stocks. Going all the way back to 1897, this is only the sixth distinct time the S&P 500 or DJIA swung at least 4% for four straight days.

The others were 10/31/29, 9/15/32,
4/22/33, 10/21/87 and 11/24/08.

Market performance after those
instances was erratic during the
next few days and months. A
year later the market was positive
by at least +29% three times, +7%
once and -12% the other.
So, we see that such moves are quite rare and tend to occur in periods of high market volatility (Duh!).

Unfortunately, they tell us little about short-term impact and follow through

-Jason Goepfert, over at SentimenTrader

Together, Vision and NPA managed to lose $100 million developing prime real estate in the hottest market in North America and you trust them to solve a housing problem let alone "reinventing" Vancouver? Give your head a shake. We need to lower our expectations of what government is competent to do and then maybe they won't continue to disappoint.

As for housing prices, look on the bright side. No doubt you are currently renting so will be well positioned to pick up that Shaunghnessy mansion for a song after the crash.

The real estate is and always has been cyclical. There is nothing new here, I recall the doomsday forecasts of the past. The market may correct but will always escalate as long as the population base grows. Ask yourself are you Chicken Little or just a little chicken?

and Gerry, before commenting on the "fundamentals" of this market, learn what "fundamentals" means.

The fundamentals of this market are incredibly strong (low valuations, strong balance sheets, healthy cash flows ---the market is corporate, not governement).

It's the technicals and sentiment that are weak.

Actually I own and have no interest in a lrger house. Smaller maybe, but I am fond of my garden and need space for grand children to visit.

I quite agree that we ask governments to do things they are not competent to do while not holding them to high standards on the things they should be focused on. I do not 'trust them' to solve th cost of housing problem, and some of the solutions one hears proposed are not within the span of authority of a municipal government.

So, I would like Vision and the NPA to say clearly what they would and would not do and what impact they think that might have.

Anyone who thinks real estate always recovers and always goes up is living in a fantasy land. If costs are too high to be supported by incomes than prices come down as people leave and economic activity fades - empty conos don't support much economic activity after the initial transaction.

Nope, just me. And greening resource industries is nothing magic. Have them cover their carbon footprints, return water to drainage basins as clean as when they drew it out, and restore land after use - that is for mining aynway. There is a big demand for the technologies to do this in China and there will be in India so there are knowledge export opportunities for places that learn how to do this. The opportunities in forestry are much more interesting for me. Our forest are a hugh resource and would generate more long-term value to shareholders, employees and even the poor tax payers who own most of the land base if we learned how to extract more value - genetic, value-added wood, growth and selective harvest of qaulity wood, forest agriculture, etc. Lots of opportunity here as well.

Bill, I'm not sure I can agree with you entirely regarding your suggestion that "Together, Vision and NPA managed to lose $100M" (it'll actually be closer to $288M by my calcs.) with respect to the previous NPA's role. I think it has been demonstrated here and elsewhere that the principle responsibilities fall on the shoulders of the Cope and VV Councils.

However, during the Vision watch it was still possible to have prevented this significant loss to Vancouver taxpayers. But, Mayor Greg & Co. had a chance to correct the mistakes of the past, and provide the promised social housing, and they chose not to do so, demonstrating that ideology trumps reason and fiscal responsibility for them. That was irrefutably irresponsible and negligent.

"actually be closer to $288M by my calcs"

I think your number matches most current projections. However, a good portion of that number has been laid at Gregor's feet for the comments he made when things went off kilter. Rather than be a cheer leader for the project to encourage buyers, he called it a train wreck that caused people to stay far away from it. He did it for political reasons, imho, rightly or wrongly. Regardless, this is a prime reason for Cities to stay out of the development game – there are too many risks as it is so we don’t need to add politicking to that list.

And, no I don't blame Gregor for the entire mess - Larry Campbell's delays in project start up and Sam Sullivans flip flops on spec also contributed to the mess. There is no one cuplrit as each party would have you beleive.

Bill, I wasn't so much fixing blame (although I agree with Paul that there is enough to go around) but that governments need to reduce their scope of activities to areas where they should be competent.

It concerns me that perhaps you think the City taking on the risk of a development of this magnitude is ok and it was only the incompetence of Vision that caused the financial loss. This is not what I want to hear. I will vote for a party that is committed to getting back to providing the basic services at a better cost and not one that just says they are for everything Vision is but would just do it better.

This article is weak in its arguments and has no relevance at all to Vancouver. Phoenix, both in terms of its economy and geography have absolutely no similarities to Vancouver. For example, Phoenix is a desert without any restrictions on land. Vancouver is land locked- 3 sides by water and the 4th by mountains. There is almost no undeveloped land in Vancouver. That fact in itself, will keep real estate prices high. Vancouver is also a major port city to Canada. Never mind the endless outdoor activities on its doorstep. I am sorry, but if you want to argue that Vancouver has a housing bubble, please use a more comparable city then Phoenix! This is akin to comparing the underwater breathing abilities between squirrels and fish!

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