Thursday, September 15, 2011

No Bubble in Vancouver, Prices to Rise 6.8% Next Year

This, according to Central 1 Credit Union. We're definitely noting this one. Have to get the mocking lined up properly.

Vancouver real estate no bubble says economist
The Central 1 Credit Union report, which was issued on Thursday, forecasts the B.C. market will slow this year and total sales will drop slightly from 2010, but prices will continue to rise an estimated 6.8 per cent next year.

According to the report's author economist Brian Yu, low interest rates that show no sign of rising quickly and the limited supply of land will keep values rising – all familiar arguments.
Yu? This gave me a flashback to Lawrence Yun, the National Association of Realtor's economist whose analyses became so laughable, he was nicknamed Baghdad Bob.

And the meat of the argument?
But Yu says there is another important reason to believe prices in Vancouver are unlikely to collapse. Market speculation —commonly known as flipping — currently accounts for only about two or three per cent of the market.
So, he argues, speculation is too low to signal a bubble.

An interesting argument except there isn't any mention of methodology or even so much as a definition of "flipping", so how to critique the assumptions? Journalism isn't useful for much these days, Australian or Canadian newspapers.

Not wanting to take a lazy "journalist" and an analyst with strong vested interests *cough*biases*cough* as their word, let's find this report.

Over at Central 1's website, under briefings, I found this:
B.C. sheds jobs in August as labour market unable to build momentum
The uneven pace of job recovery continued in August as estimated employment in B.C. fell by 6,000 persons or 0.26% to a seasonally-adjusted 2.268 million persons, erasing gains observed in July. This compared with a nearly unchanged national figure.
Oops, that's not it.

Ah, here it is. Not sure why the article didn't link to it.

The Wish List Highlights are a great chuckle inducer. Click the link to see them.

However, activity is unlikely to erode further from the current pace, as a low price growth environment and downside pressure on already low mortgage rates maintains affordability – providing support to housing markets.
I can't wait to see how they define "affordability" can you? I bet they don't. Defining it would force them to haul out the stratospheric median multiple. What is it these days? 9? 11? So to throw the words "maintain affordability" together is already signaling this analysis is a joke.

The projected impact of B.C. residents’ August vote to extinguish the year-old harmonized sales tax has been incorporated into this forecast. The B.C. govern- ment expects to return to the previous PST/GST tax regime by March 31, 2013.
Interesting. And reading along, the whole savior of their forecast is a frenzy sparked by this rule change.

Isn't this graph a winner? Look at how the price was stable for all those years and then, wow, off it goes, but it's not a bubble. It can't be, Central 1 says, Who are you going to believe, me or your lying eyes?

Also note they are combining all of BC together as if the markets have anything in common other than an address.

But this is the graph we are looking for:
First off, I have to note, I really like how they choose various year ranges for their graphs so as to highlight their point. Every graph has a different range. Imagine, for example, that the median price graph from earlier showed the same range 1987 on. It might show that prices were level even farther back in time, and worse yet, might show them declining from the previous bubble. Oh, and look, suddenly it's Vancouver only. Tricky devils.

But the core of this argument hinges on what they mean by speculation. Here's the whole paragraph:
In addition, speculative demand in the region remains low. The proportion of units re-sold within six months of purchase can be used a proxy for speculative activ- ity. In theory, speculators look to gain through capital appreciation over a shorter time-frame relative to home-owner occupiers. In a period of higher specula- tion, which is generated by strong market activity and price gains, this proxy generally rises. However, this metric has exhibited a declining trend since early 2008, currently hovers near 2% and operates near normal levels. In contrast, this proxy surpassed 10% in the late 1980s, and was closer to 6% in 2006 when markets were overheated. The lack of excessive speculation suggests that we are unlikely to see a speculation-induced bust in pricing.
I really like the self contradictory nature of that second to last sentence. WELL, in 2006 the market was overheated, obviously, but now (that it's actually far exceeded that level) it's not overheated. Nice trick, that.

Personally, I think this shift in hold time means we have a different kind of buyer pushing up the high end, people who intend to speculate over a longer period of time. Buyers who only in the last 13 years have even had wide access to a mortgage at all (1998 on back in the home country), buyers who have never, ever, experienced a real estate price decline, buyers who are often parking questionable gains from overseas and if they keep any of their speculative dollars they come out ahead. But it is interesting, this shift in hold time, I'll grant them that. But that's all it is, a shift in the distribution of hold time. Trouble is, speculation is not just flipping.

There is a significant speculative component they are ignoring, willfully, I'm guessing. That of buy and hold buyers who are stretching their personal finances for a place to live, medium to long term, on the assumption that the price will rise and they will be rewarded for their risk. In fact, stretching becomes an investment tactic all its own, rather than a massively leveraged venture with huge downside risk (which it actually is). This is still speculation.

B.C.’s economic recovery will enter its third year in the second half of 2011, assuming no U.S. or global economic recession occurs during the remainder of the forecast period. There is a risk of recession of about 20% to 30% due to external factors, some of which are non-economic, but it is difficult to deter- mine timing and causes. A financial crisis in Europe is currently at the top of the list.
This has been a long-term pet peeve of mine. Did you know it is utterly impossible for Canada to have a downturn all their own? Completely and unthinkably impossible.

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