A Call from the Deep

Last Friday evening I went to see a game at the rebuilt stadium.  Feeling a little thirsty, I took a beer from a passing vendor.  It was a hot night and I quaffed my brew quickly.  As I looked into the empty cup, however, I did a double-take.  There on the bottom of the cup was a round red sticker.  It was his signal.  Wasting no time, I hurried down below the bleachers to the old exit tunnel.  Even before I saw him, the smell of his smouldering cigarette announced his presence…

 

 

DEEP THROAT:  It’s starting.

 

ME:  What’s starting, Deep Throat?  You’re not talking about the game are you?

 

DEEP: I wish I was.  No, I’m talking about the Vancouver real estate melt-down.

 

 

Figure 1: “It’s starting,” he said

 

 

ME: Melt-down?  Prices are barely off from the peak.  I know, Vancouver’s average house price-to-household income ratio of 9.3x is insane, given that the US bubble peak was 5.0x, but I can’t see what will force it to come down.

 

DEEP:  Look at the American market bust, kid.  It started with lower unit sales.  Lower sales led to higher inventories.  Higher inventories led to lower prices.  Now look at Vancouver.  June sales declined over 30% against higher listings.  And July activity is even slower.

 

ME: OK, so a seller’s market has become balanced.  But look at the interest rates, Deep.  Floating mortgages are being offered  below 2% .  How can a market break down when it costs almost nothing to finance your house?

 

DEEP:  I agree it seems odd, but that’s what happened in the US.  The teaser-rate mortgages were still widely available back when the market topped in Q3 2006.  The real catalyst was that they ran out of buyers.

 

ME:  So is that what the 10 year high  in Vancouver apartment vacancy rates that we saw in the spring was about?

 

DEEP:  Now you’re getting it.  In a normal market, record prices occur at times of tight occupancy.  But with bubbles you get a kind of “black hole effect.”  At the top of the technology bubble, investors dumped cheap stocks to chase Nortel.  At the height of a housing bubble even marginal renters get swept into home ownership.

 

ME:  But what about the Olympics?  That ought to provide some sort of boost for Vancouver housing from foreign buyers.

 

DEEP:  If there are foreign buyers, where are they?  Judging from newspaper accounts, Olympic Village condos are not moving.  That doesn’t seem to indicate massive inflows of foreign money.  Maybe the foreigners are selling.

 

ME:  OK Deep, you got me.  So let’s say we’re in the early days of a correction.  How long until the bottom?  And how far down do we go?

 

DEEP:  Seattle’s down about 25% from the peak.   Los Angeles, San Francisco and San Diego are each off about 35%.  I can’t see why Vancouver, which is at least equally pricy, couldn’t do as much.

 

ME:  But wait, Deep Throat, can’t the government prop the market up?

 

DEEP:  They might try, but what have they got left to do?  The government already guarantees most Canadian mortgage loans.  They might hand out money, but that could backfire if it scares the bond market or if the fresh money chases the wrong assets.

 

ME:  But if the market goes off even 25% you know what this town’s going to look like.  What should I do?

 

DEEP:  It’s easy to worry, but as an investor you have to think about opportunity.  If a bank has a book of bad loans, sell it short.  Plus, a housing bust might push the loonie a lot lower.   A lower C$ implies higher precious metals and higher wheat amongst other things.  Find the silver lining kid and hold on tight.

 

 

At that moment, a giant roar erupted from the crowd above.  I looked back up the tunnel to check the scoreboard. When, I turned back, Deep Throat was gone.  In his wake he left only a faint smell of tobacco and, as always, some unanswered questions.

Comments

[PBrasseur]

Agreed, nice presentation BTW.

I think the BC market could sink quite fast, similar US markets did, only that was BEFORE the recession....

Rest of Canada, I see a long slow decline.