By Garth Turner, April 6, 2016

The enemy of success is human nature. We buy high, sell low and believe realtors. Stuff we hear from peers or (the ultimate authority) family carries more weight than experts who are but a Google away. Our perception of things is coloured by emotion, and often wrong.

To wit. ‘Investors’ sucking up multiple condo units in the country’s two most inflated markets. CMHC says a quarter of 42,000 buyers survey have bought more than two concrete boxes, while at least 10% have snapped a minimum of three. Of course, nobody can buy a condo in 416 or YVR these days, at these prices, and collect enough rent to cover costs. The only possible hope is capital appreciation – enough of it to overcome commission and transfer taxes. Good luck with that.

But it gets worse. Nik Nanos’ latest survey found 33.1% of Canadians expect the economy will deteriorate  (24.7% believe it’ll get better), but almost 39% of us expect real estate prices to climb. It’s now the highest degree of housing optimism since the end of 2014 – and comes as the average house price crosses the $500,000 mark for the first time.

Why? One word. Millennials. Over eighty-five per cent of these poor, young things are convinced the best possible investment is a house.

We know why. A 24-year-old who became sentient seven years ago has known nothing but advancing real estate values and plunging money costs. It’s the new normal. People line up to buy apartments not yet built. House-horny parents tell them renting is throwing money away. Financial illiteracy is rampant. Nobody trusts financial markets, corps or central banks. Then along come politicians saying the rich will pay more so they can pay less and there may even be an annual income for all – while the government leads by example, spending vastly more than it collects. What else are they supposed to think?

So Nik found 83% of people don’t believe real estate can, or will, go down. That should scare you. Two reasons.

First, it means more upwards pressure in the key markets over the next few months. It’s now evident the mortgage changes Bill (“Charge it”) Morneau brought in did diddly to halt the market’s advance. Boosting down payment requirements on houses costing between $500,000 and a million ended up being a total non-event, defeated largely by private lenders and the Bank of Mom. If anything, anticipation of the late-February change propelled sales, as did a largely non-existent winter.

Most people, and virtually all of the moist ones, don’t think interest rates can rise (ever), nor do a majority of them consider mortgages to be debt. They’re just another form of rent, but one your parents approve of. Besides, houses always go up, so why wouldn’t you borrow as much as any goofy banker will give you?

The evidence of this insanity is with us daily, now. Average prices have catapulted higher by 15-23% in our two bubble cities at the same time commodity values have tanked and wage growth has stalled. The increase in debt shows where the bulk of the capital is coming from. The transfer of wealth from equity to debt to stunning. Savings are being depleted, RRSPs cashed in and investments deferred, all so people can throw available capital into a single asset class, now more leveraged than ever.

The second reason this should scare you? Most people usually err in their perceptions, then react emotionally. Thus, Nortel went from $120 to zero. Bre-X went from nothing to $286 a share, to nothing. Properties in Fort Mac have lost 40% of their value in two years because they were inflated by emotion, now felled by reality. Gold soared to $1,900 on speculation and mass buying in 2011 and is 36% lower. Oil was $140 a barrel nine years ago and now has a good day when it hits $36. The TSX lost 55% of its value in 2009, after a decade-long run had sucked billions into maple. It’s a safe bet you’ll be able to add bungalows in East Van and slanty semis in Leslieville to that list in the years to come.

Does this mean only fools would buy now?

Not in some markets, and not anywhere if they understand and accept the risks, or aren’t putting too much of their net worth into one, swollen asset. I own real estate. My last purchase was three months ago. But it was a distressed buy, a third below list price. There were no bidding wars, no bully offers, no competition. Just value.

Well, you may have noticed I’m no Millennial (despite the stubble and six pack abs). My world view was formed over years of boom and bust. That’s produced a cynical fossil who understands no asset class in history has ever risen without falling, and human nature has never evolved. Guys like me learned long ago it’s never different this time. Some of us didn’t learn to shut up about it, though.

http://www.greaterfool.ca/2016/04/06/being-human/

By Garth Turner, April 8, 2016

“This,” Peter the realtor tells me, “is just dumb and greedy.”

Hard not to agree. It’s a decade-old, cookie-cutter suburban pile on a 44-foot lot an hour’s drive (on a good day, at the right time, in an A7) from downtown Vancouver. (The same distance as from the core of Hamilton to Bay & King in Toronto, where they keep all the money.)

“The current owner bought it in September of 2014 for $675,000,” Peter says of the house now listed for $1,288,800. “Just dumb & greedy. And it’s in Langley, for Pete’s sake.”

Speculation and, yeah, greed are setting us up for an unknown but likely nasty consequence. This is despite the far-better economic news we’ve had lately – the muscular economic growth in January, and a gain of 42,000 jobs in March along with a rebound in oil (up 6% on Friday). That’s welcome for a country that was in recession a year ago, forced to slash interest rates twice in order to avoid a worse outcome as crude shed more than 70% of its value.

But the fact remains avarice is now the deity in control of Greater YVR, the GTA and anywhere else where people go to bed dreaming of fat profits, house-horny Guangdong industrialists and windfall, tax-free capital gains. It’s usually at this point in the cycle when fear of being priced out of a markets starts turning into buyer disgust. Never a good thing.

It’s not just Van, of course. Some days ago I brought you tales of bidding wars, insane open houses and unbridled prices in suburban Oakville. The same is happening Richmond Hill, Vaughan and even Milton, Burlington and the saucy bits of Brampton. As the BeeMo economist quoted here yesterday cautioned, romping prices bring more romping prices. Until the whole thing blows up.

So what’s happened in 416 comes to infect 905, just as the bizarre events in the housing market in urban Vancouver hit the hinterland. Now average prices in the Fraser Valley are 26% ahead of 2015 levels, pacing the bloat in the city. Says the local real estate board president: “This market is uncharted territory for Fraser Valley real estate, It’s typical for spring to see a jump in activity; however, March came and went at a break-neck, record-setting pace. I’ve never seen anything like it.”

North Van is up 24%, Richmond prices are ahead 26% (to almost a million, on average), Coquitlam has gained 18% and even Surrey is 15% more expensive. In the GTA, far-flung York Region and Orangeville prices have jumped 15%, while Durham’s 14% increase is slightly more than that of Halton. What was once reasonably contained to the Kingdom of 416 and the Delusional Duchy of Downtown Van has now seeped into the countryside in a way local observers are calling “drastic.”

It goes without saying that family income levels in these two regions have not suddenly mushroomed. Job creation has been anemic. And debt service burdens have been rising, not falling. Meanwhile blaming all the foreign dudes with their suitcases stuffed with cash isn’t all that credible an excuse. In a TV interview yesterday GTA developer Paul Golini – a guy who builds condos and houses – said the whole offshore-buyer thing is getting old. “We really think that there isn’t a problem here,” he said. “We think the numbers don’t justify the fact that we’re on this witch hunt.”

More evidence of that comes from a new CHMC report estimating that about one in 10 new condos in the downtown core (built in the past five years) is owned by foreigners, with the overall ownership rate standing at 4%. Of the new-build estimate, Golini says: “It seems a little bit high, you know we met just recently with some other industry folks and everyone reported a number that was closer to 5%.”

Peter, a blog dog in Vancouver (and a Millennial – he admits it) says this all makes him wonder about the veracity of what he hears from friends and realtors. “Even if there are 10% foreign owners in Toronto condos doesn’t that mean there are 90% domestic owners? (Ha) Wouldn’t that just prove your point that this speculative price surge was done by self rather than others? Perhaps the foreign money was some gasoline on the fire but it doesn’t reflect the other 90% of buys…”

By the way, CMHC also found 6.6% of condos built in Van in the last six years are foreign-owned, while 4.4% of older units are similarly held. In Calgary, foreign owners hold 0.1% of older units and 1.6% of newer ones. In Montreal the foreign ownership level is 1.6% while it’s 2.3% in Victoria.

Well, draw your own conclusions. But asset bubbles are always characterized by local euphoria, greed and wilful blindness. I’d say we’re there.