http://news.goldseek.com/MillenniumWaveAdvisors/1264953600.php

Below quote is from the article above:

“If there is one common theme to the vast range of crises we consider in this book, it is that excessive debt accumulation, whether it be by the government, banks, corporations, or consumers, often poses greater systemic risks than it seems during a boom. Infusions of cash can make a government look like it is providing greater growth to its economy than it really is. Private sector borrowing binges can inflate housing and stock prices far beyond their long-run sustainable levels, and make banks seem more stable and profitable than they really are. Such large-scale debt buildups pose risks because they make an economy vulnerable to crises of confidence, particularly when debt is short term and needs to be constantly refinanced. Debt-fueled booms all too often provide false affirmation of a government’s policies, a financial institution’s ability to make outsized profits, or a country’s standard of living. Most of these booms end badly. Of course, debt instruments are crucial to all economies, ancient and modern, but balancing the risk and opportunities of debt is always a challenge, a challenge policy makers, investors, and ordinary citizens must never forget.”

And this is key. Read it twice (at least!):

“Perhaps more than anything else, failure to recognize the precariousness and fickleness of confidence-especially in cases in which large short-term debts need to be rolled over continuously-is the key factor that gives rise to the this-time-is-different syndrome. Highly indebted governments, banks, or corporations can seem to be merrily rolling along for an extended period, when bang!-confidence collapses, lenders disappear, and a crisis hits.

“Economic theory tells us that it is precisely the fickle nature of confidence, including its dependence on the public’s expectation of future events, that makes it so difficult to predict the timing of debt crises. High debt levels lead, in many mathematical economics models, to “multiple equilibria” in which the debt level might be sustained – or might not be. Economists do not have a terribly good idea of what kinds of events shift confidence and of how to concretely assess confidence vulnerability. What one does see, again and again, in the history of financial crises is that when an accident is waiting to happen, it eventually does. When countries become too deeply indebted, they are headed for trouble. When debt-fueled asset price explosions seem too good to be true, they probably are. But the exact timing can be very difficult to guess, and a crisis that seems imminent can sometimes take years to ignite.”

How confident was the world in October of 2006? I was writing that there would be a recession, a subprime crisis, and a credit crisis in our future. I was on Larry Kudlow’s show with Nouriel Roubini, and Larry and John Rutledge were giving us a hard time about our so-called “doom and gloom.” If there is going to be a recession you should get out of the stock market, was my call. I was a tad early, as the market proceeded to go up another 20% over the next 8 months.

As Reinhart and Rogoff wrote: “Highly indebted governments, banks, or corporations can seem to be merrily rolling along for an extended period, when bang! – confidence collapses, lenders disappear, and a crisis hits.”

Bang is the right word. It is the nature of human beings to assume that the current trend will work out, that things can’t really be that bad. Look at the bond markets only a year and then just a few months before World War I. There was no sign of an impending war. Everyone “knew” that cooler heads would prevail.

We can look back now and see where we made mistakes in the current crisis. We actually believed that this time was different, that we had better financial instruments, smarter regulators, and were so, well, modern. Times were different. We knew how to deal with leverage. Borrowing against your home was a good thing. Housing values would always go up. Etc.

The demographia.com website has the latest housing
affordability study front and center. See Garths “the big
one” from a few days back. The study has been greatly mis-qouted as “vancouver has the most expensive RE in the world”. The study uses the “affordability” ratio and only studies six anlgophone countries.

As Sarah’s picture awaits, I will only counter that rates
are closer to historical norms now than they were in 1981
or perhaps 1990. So maybe house prices were held
artificially low during those periods.

We can catch up later.

“You are bashing bears for being intelligent and talking up real estate as though it’ll never depreciate substantially.”

Actually, YOUR intelligence was called into question by Taxpayer 138 who pointed out that your concept of “affordable” in 2006 was incongruent with your own bear metrics.

And what is with the emotional plea of me caring about the “consequences” of my upselling RE?

Buddy, go ask that question to the realtors, the bankers, the developers, the government – in other words all the “salesmen” out there whose purpose was to get people to buy. Do you blame a car salesman because you bought a product based on his “advice” and it turns out to be crap?

Or ask yourself the same question – do you care about the consequences of your own advice that may have resulted in people missing out on a 25% runnup and the chance of owning their own home?

Buyer beware and do your own due dilligence is something that everyone should be aware of. Stop trying to be the noble individual that altruistically warns people not to buy…

How can we put pressure on the federal Competition Bureau to brake up the CREA? Since they are getting on the CREA maybe this is the time for people to speak out and put the final nail into this IMO criminal organization. Anyone have an idea on how we can all put pressure and crush them and this bubble once and for all?

Its simple. Your own buzz is unrealistic. You are bashing bears for being intelligent and talking up real estate as though it’ll never depreciate substantially. If anyone takes you seriously at all, you’ll do nothing but harm. Do you care? Thats what I want to know. Do you have any feeling whatsoever on the possible consequences to your own influences on this site?

I do. Make mistakes all the time and they are sometimes quite easy to spot. But don’t we all, Vancouver rocks. If you don’t find yourself humbled from your stances on this site, reality itself will find a way of humbling you. All it will take is a hike in rates and this party is over.

I am very angry at the liberal party by their opportunistic and bad dcisions and I tell you why. I voted liberal all the time except last election. because they were incompetent and they basically took no firm position on any issue So they lost the vote. time passed and there came out of US Mr. Egnatieff and couldn’t wait to be a PM . When the news about the economy slowdown came at the time of the budget Mr. Flehrty said the gov. like all canadians must tighten their belt and go through this , oh my god !all the insult started that the gov. has no plan and people are loosing their job ..and save GM ..and put a 30 Billion $ shovel in the ground asap we don’t care where and Harper has no plan ….and Ganging up to bring the gov. down. and putting the gov. on probation and all the propeganda and . nobody wanted to do the right thing . now they say why this much defficit its all Harper’s fault we could do this and that.

I now see even if sombody wants to do the right thing they bully him and waste people’s money.
Now I do not want to defend Harper nor blame the liberals too much just want to say for God sakes just make a decision for people and agree on it . What have we regular people done to deserve so much hardship.

Who is gonna pay this defficit and all these HST and GST and all this taxes from our tiny after tax income and don’t you even ask about Toronto under Mr. Generous with people’s money Mr. David Miller.

I am so diappointed

Garth, Do we have a choice to vote somebody else ? if we do I am with you. it seems that good politicians lost the courage and bad politicians dirty talk the opponent out of the game and pass the ball to each other back and forth and us left to look after ourselves.

Yeah, you’ve got me thinking with that one. I didn’t think Vancouver values had only risen 21% since 2006 until you forced me to look into it of which I’m thankful. After looking into it more closely, 2004 levels are much more realistic benchmark of re-entering the Vancouver RE market which would mean a 38% correction from where it is today. Even if RE values rise another 15% this year if interest rates remain unchanged, I would think that Vancouver RE will revisit 2004 valuations as rates begin to rise regardless of where Vancouver peaks.

This link, I found interesting in search of Vancouver RE historical Vancouver RE valuations which backs up your ascertion that Vancouver RE has risen a paltry 21% since 2006.

http://www.chpc.biz/Vancouver_Real_Estate_Chart.htm

http://bp2.blogger.com/_PiR0viQSvUQ/SCdpktKrQNI/AAAAAAAAAC4/S16CXUMSuzI/s1600-h/canada_interest2.png

Please compare this chart above with the last 23 years of interest rates to get an idea of how dramatically interest rates influence RE markets with Vancouver as no exception, with Vancouver buyers financing for lion’s share of their mortgages regardless of where they are from or moving to. Although 5 year term rate chart provided by the link above is slightly dated, we all know that terms are now around 3.79%, lower than they have ever been before in Canada’s history. This has taken Vancouver back to its bubble peak values which have risen 16.2% from Nov 2008 to Nov 2009.

When combining the link above with a historical chart of interest rates, its plain to see that increased mortgage affordability boosts RE valuations. Long amortizations combined with record low interest rates has stoked the RE markets in Canada like never before (and likely never will again). In essence, Vancouver is in a bubble that is at extreme risk of imploding with even the most modest of rate hikes? With 40% of current mortgage holders floating, another 10% at 1 year terms and the remaining 50% at 5 to 7 years, the answer is a loud yes. Rate hikes will not only have a dramatic impact on monthly payments, it will have a dramatic impact on consumer spending as it reduces disposable income.

http://vancouvercondo.info/2010/01/at-home-in-the-tulip-patch.html

Its simple math, really. A $700,000 home that was impossible to finance for most 5 years ago can be done with a $70,000.00 net income today. With a 35/5 mortgage, interest on $665,000 on a 3.79% 5 year term is $25203.00 Add 20,000 on for principle and debt service is $45203.00, or $3767 per month. The question most of us should be asking, is… thats all? Sounds too good to be true… cause it is.

Lets say interest rates come back to a more normal 8% as evidenced by this historical chart (where is that chart):

http://bp2.blogger.com/_PiR0viQSvUQ/SCdpktKrQNI/AAAAAAAAAC4/S16CXUMSuzI/s1600-h/canada_interest2.png

Payments at 8% suddenly become $6100 a month as opposed to $3767 today. Will today’s 5 year term holders be able to adjust to a mortgage hike of $2300 a month? Maybe… maybe not. Maybe they float in the hope of dropping rates so they can better cope but the gamble doesn’t pay off or by 2015 rates are 10% or rise to it. Monthlies suddenly balloon to $7208 per month, or nearly double the monthly payments on the same mortgage of today. Will today’s homebuyers be able to afford to hold onto their homes?

Certainly common sense dictates that new buyers won’t be able to afford these higher, more realistic levels of debt and the market will correct accordingly. In this case however because the numbers are much larger in Vancouver, higher rates would spell disaster for Vancouver RE.

Thanks for forcing me into taking a better look at Vancouver. I can easily see RE values returning to more realistic 2004 levels as interest rates rise accordingly.

I found this link below to be quite amusing. It reminded me instantly of Vancouver Rocks most naturally, as I read it.

http://vreaa.wordpress.com/2009/09/28/bearish-since-2004-looking-for-a-semblance-of-sanity-in-vancouver-re/

I’m a total amateur at reading/interpreting charts, but I think I could make a case for 340K being the support price (about 20% drop from 420K high).

In 2005 about 340K was a bit of a ceiling, before breaking through in 2006. This then turned into a support level tested at the end of 2006 and again in 2008. I imagine under this level may be over correction territory?

Or I could be totally out to lunch on this this and should leave commentary to those who have a clue….

Thanks for pointing out that nice little nugget!

131 Daystar

If you think that 2006 prices were affordable by your bear metrics of a 1:3 income to price ratio, then you are delusional or simply cherry picking what is a bear metric. And yes, there was a buzz around town and by some bankers that were were in a bubble because of the rapid appreciation in two years. TD even published a report in 2004 that raised bubble concerns in Vancouver….

Bear blogs in VANCOUVER (

#109 DUI on Money Road
I have no problem paying my fair share of taxes and I do every year like the rest of us …but I do have a problem with paying taxes when the people I pay them too have such little regard for the money I do contribute and think I will happliy give more just because they want more …you do know you could do more for your country and just sign your whole cheque over to the CRA …is that the intent of your comment.

#90 luckyc
As to Bill C-10 …I dislike when particular groups are targeted and others are not …my idea is everyone gets picked on equally to balance both sides…fairness for all.

Good night all …been a fun day.