Tuesday, September 1, 2009

As Summer fades the time has come to re-evaluate the bear case


The last twelve months have been very interesting. This time last year the financial crisis was galloping along and taking with it the highly speculative Vancouver Housing market.

We hit a no bid situation as everyone hoarded money, wondering which banks and even countries (eg Iceland) would be closing down. MOI hit twenty months, the stock markets lost 50% in half a year and it looked as if the bears' most dire predictions were coming true and we would all be carried off the cliff.

However the central banks and governments of the world, having done NOTHING to stop the speculative bubble, acted en masse using Trillions of our money, and promising obligations to future generations not yet born, to stem the bleeding.

The result was an abrupt turn around in the Vancouver market.


We really hadn't seen much of a recession in BC early in 2009. The Liberals were still talking about small and manageable deficits, there were lots of large Olympic and non-Olympic related building projects and suddenly we had the lowest mortgage rates in the last 40 years, lower gas and heating bills and Federal tax incentives.

The result was that the fire was reignited. SFH are within spitting distance of the previous highs.

Here is Larry's up-dated price chart:

http://www.yattermatters.com/real-estate/vancouver-real-estate-august-average/

Now it gets interesting. There are a few things worth noting:

1) The Provincial fiscal situation is not good. We are headed for a $2.8 Billion deficit and that assumes the worst is over, which I personally doubt. Cuts ahead, I expect the Federales who are $50 Billion in the hole to follow suit too and start cutting.

2) Unemployment will continue to rise and will do so even if we have the anemic recovery that would be my best case scenario.

3) The big projects are done...Canada Line, Golden Ears, Whistler Highway..where will these folks get hired now?


AND...

The boom that we have seen over the last 6 months or so has been pretty selective. the bubble was everywhere...Vancouver, Fraser Valley, Vancouver Island and the Okanagan and in all types of housing.

The bounce has been mostly in Vancouver and Victoria SFH. One look at Larry's chart will show that. In fact while SFH prices are up an astounding 10% YOY, condos and Town-homes are down 1% YOY.

Similarly the housing situation outside of Vancouver has been much more subdued. Many place are still falling (even beautiful cities, if they are resource based) others just stopped dropping and stabilized but are vulnerable to a dip.

The current graph of house prices is completely compatible with the bursting bubble graph :

http://2.bp.blogspot.com/_mJmwQtPmusk/R8qBvunTR1I/AAAAAAAABik/1xij0kBSJ30/s400/bubble-lifecycle.gif

However if prices keep going up, despite a worsening economic environment and a bubble graph which is calling for an imminent drop, then we will have to rethink the basis on which we have made our assumptions..ie we were wrong!