November 4, 2015

Self-Delusion Is Common During Bubbles

The Province reports from Canada. “In a recent six-month period about 70 per cent of all detached homes sold on Vancouver’s west side were purchased by Mainland China buyers, an academic case study shows. Even more stunning, the study shows that of all self-declared occupations among owners — on homes worth an average $3.05 million — 36 per cent were housewives or students with little income. And 18 per cent of the 172 homes purchased were not mortgaged by banks. That means roughly $100 million in questionable cash was poured into Vancouver’s west side from August 2014 to February 2015, much of it from China. Total value of all homes sold in the study period was $525 million.”

“David Eby, the NDP MLA for Vancouver-Point Grey, told The Province he helped city planner and researcher Andy Yan undertake the B.C. land-title study because many of his Vancouver west side constituents have complained about hollowed-out neighbourhoods, absentee investors, property flipping, and suspicions of money laundering and unfair tax avoidance. Eby said the study fills a data gap in Vancouver and ‘bears out the anecdotal feelings that people have about Mainland China buyers.’ ‘We’re still at the point where we won’t even admit we have an issue, while other jurisdictions have studied this or taken action,’ Eby said. ‘It’s my hope this data shows that this money has a profound influence.’”

“‘When you see all the homemakers and students on the titles buying $3-million homes with mortgages, it really supports the idea that money from somewhere else is coming in,’ Eby said. ‘The questions that come up for me are: China is an authoritarian state that has lots of issues with corruption. Is the money coming into Vancouver the kind we want to be encouraging? And are we doing everything we can to make sure we leverage this investment to benefit British Columbians as much as possible? Or is this just benefiting the super-car dealerships on Burrard Street?’”

The Montreal Gazette. “A red flag has been raised on Montreal’s housing market in the latest Housing Market Assessment from the CMHC. Weak growth in demand from first-time home buyers, relatively modest growth in disposable income, and a glut of completed and unsold condos are among the factors cited by the CMHC in the strong evidence of over-valuation. In the condo market, where there is a lot of supply and it is a buyer’s market, there could be price decreases if economic conditions deteriorate.”

“The report states that management of inventory is necessary to ensure the current high number of condos under construction does not remain unsold when completed. Steps in the right direction were reported this week, with housing starts to drop significantly in 2015 — 26 per cent in the condo market this year — before picking up slightly in 2016 and 2017. ‘What’s encouraging is that we’re seeing builders slowing down the pace of new condo projects this year. That will help to absorb units in inventory or under construction,’ said David L’Heureux, principal analyst for Montreal with the CMHC. ‘We’re still going to monitor it closely because there is still a lot of supply to be absorbed.’”

The Financial Post. “For landlords there’s no denying it: Apartment renters are in the driver’s seat like never before, with the situation most obvious in Alberta where vacancy rates have spiked. Canada Mortgage and Housing Corp.’s October rental report showed that vacancy rates have risen to 3.5 per cent nationally, from 3 per cent a year earlier, for purposed-built units (buildings with three or more apartments). For condominium units, rented out by investors, the national vacancy rate jumped from 1.6 per cent to 2.3 per cent.”

“Nowhere is the situation more dire than in the energy dependent provinces of Alberta and Saskatchewan. Alberta’s vacancy rate jumped to 5.6 per cent from 2.1 per cent for purpose-built units while Saskatchewan’s rose to 6.8 per cent from 4.1 per cent. ‘It’s the outcome of a weakened economy,’ said John Dickie, president of the Canadian Federation of Apartment Associations. ‘Alberta is a tenant’s market. I’d be negotiating on a renewal. I’d be seeing if there’s any softness in the asking rent.’”

“Even in Toronto’s still strong housing market there are some signs of weakness. The condominium apartment vacancy rate rose to 1.8 per cent in October from 1.3 per cent a year earlier while the average rental rate for a two-bedroom condo unit fell to $1,754 a month from $1,818 a year earlier.”

From CBC News. “Once a landlord’s paradise, Calgary’s rental-housing market has become a tenant’s dream — at least when it comes to what’s available. The city’s vacancy rate has nearly quadrupled in the span of just one year, according to the fall Rental Market Survey from the Canada Mortgage and Housing Corporation. Calgary’s vacancy rate stood at 5.3 per cent in October, according to the survey, up from 1.4 per cent in fall 2014.”

“‘The rise in the national vacancy rate was due to lower net migration in regions most affected by low oil prices as well as an increase in the supply of purpose-built rental apartment units,’ chief economist Bob Dugan said in a release.”

From 660 News. “Gerry Baxter with the Calgary Residential Rental Association said that he knew it was up with all of the out-migration happening, but this is bigger than anticipated. ‘Right now, it’s a tenant market because there’s an abundance of vacant units across the city,’ Baxter told 660 NEWS. ‘Most people that I speak with today are certainly not looking to increase rents. In fact, many of them have actually reduced their rents to try and attract clientele or customers to their buildings. So many people have left the province, again. We went through this back in 2008 and 2009, but not quite as severe as what we’re seeing today.’”

The Calgary Herald. “The average MLS sale price of homes in Calgary in October had the biggest year-over-year drop in value this year and total dollar volume for the year is now down by about a staggering $3 billion. October was the 10th straight month that average sale prices have dropped from the year before in the city. In October, they fell by 6.1 per cent to $457,513 – the lowest average sale price of any month this year. It is also the lowest monthly price since December 2013. October also was the 11th straight month of year-over-year sales declines, falling by 33.3 per cent to 1,421 transactions. It was the lowest level for an October since 2011.”

“‘The plummeting house prices are indeed a reaction to the declining provincial economy. Real Estate fundamentals show the relationship between the GDP, jobs, and people. As the economy improves, jobs are created and people move to the area, putting upward pressures on vacancy, rents, and values. The opposite is also true,’ said Melanie Reuter, director of research with the Real Estate Investment Network.”

“Year-over-year, MLS sales fell by 32.4 per cent in the detached city market, by 30.9 per cent in the attached market and by 38.9 per cent in apartments. Average sale prices also declined in all three categories – 7.3 per cent for detached; 6.9 per cent for attached; and 1.5 per cent for apartments.”

“‘Persistent weakness in the overall economy continued to impact housing demand in Calgary as October sales were nearly 16 per cent below long-term averages,’ said Ann-Marie Lurie, CREB’s chief economist. ‘In addition, new listings did not decline enough to prevent inventory gains and, ultimately, price contractions.’”

The Daily Observer. “Saturday was Halloween, and children were saying ‘trick or treat’ as they helped themselves to some candy. As Halloween happens but once a year and involves sweets, trick-or-treating is seen as harmless fun. By contrast, the trick-or-treating (or, more accurately, trick-and-treating) that has come to shape the Canadian economy is likely to end in tears. For the past 15 years the financial system has been busy performing the one trick it knows - expanding the quantity of money and credit - on an ever-grander scale.”

“Today, Canadians are among the most indebted people on earth. Much of the money borrowed by Canadians was used to buy real estate. As billions of dollars flooded into the property market, prices rose markedly. To understand the risks associated with rising debt levels which both support and are supported by rising asset prices, it is helpful to have a look at something Charlie Munger (Warren Buffet’s business partner) has dubbed ‘the febezzle’ or ‘functionally equivalent bezzle.’”

“The Canadian economist John Kenneth Galbraith coined the term ‘the bezzle’ to describe the increase in imagined wealth that results from embezzlement. As the economist John Kay put it in his recent article entitled ‘The Bezzle Years’ - ‘The joy of the bezzle is that two people - each ignorant of the other’s existence and role - can enjoy the same wealth.’ Munger’s febezzle does not depend upon criminal embezzlement but rather upon self-delusion of the kind that is common during market bubbles. Credit-fuelled asset bubbles create a great deal of illusory wealth.”

“So long as the illusion is maintained, though, everyone can experience the joy of the febezzle. In the case of a housing bubble, existing homeowners can borrow against and spend the gains resulting from higher home prices, the banks can increase lending, earn record profits and pay their employees large bonuses and the government can collect higher property taxes and development fees.”

“However, it is good to keep in mind that the houses themselves have not changed. Fundamentally, the increases in income and spending that are attributed to rising home prices are in fact the result only of increased borrowing and rising debt. Long after the joy of the febezzle is a distant memory, the debts incurred by households against their homes will remain. Unhappily for many, the apparent treat of rising home prices resulting from the trick of expanding the quantity of money and credit will be revealed to have been just another trick.”

Bits Bucket for November 4, 2015

Post off-topic ideas, links, and Craigslist finds here. Please visit my Youtube channel which you can also find here: