It appears that we've hit the peak in units under construction (dark blue line). As the number of units falls, we should watch for the impact on employment.
It is truly amazing how the construction sector has boomed during these past few years. From the lows of the year 2000 to the lofty heights of 2008. And now here comes the ride back down again.
Mohican,
ReplyDeleteMost people still do not realize the extent of the price drop due to overbuilding, huge inventory accumulation followed by competitive devaluation by developers. The Vancouver RE prices will get halved within 2-3 years.
I completely agree. I think the price declines will range from 25 to 50 percent depending on the area, housing type, and extent of the price runup.
ReplyDeleteClearly some areas are just not as overvalued as others but in Yaletown condos, for example, the price needs to drop 50% just to resemble some kind of fair value. On the other hand, single family homes in Surrey with a basement suite just won't fall as much - perhaps 25-30% to bring them back in line with fair value.
Of course, things can drastically overshoot to the downside and I wouldn't rule out 70% price drops in some particularly overvalued areas.
Of course it will overshoot. The rising unemployment from 4% to 8% will make affordability even worse.
ReplyDeleteThe fixed mortgage rates did not drop as the government bond yields dropped last week. The liquidity in mortgage debt market is getting worse. The US Gov had to bail out agencies to bring the mortgage rates down.
The areas with easy reach to rapid public transport should fare better, but the overbuilding, higher unemployment and credit contraction will have substantial impact on every area.
On the other side, we should expect unprecedented Canadian government subsidies to mortgage industry. I also think it is quite possible that Government will introduce tax deduction on mortgage interest to "improve" affordability for people.
Great plots, thanks! Do you know a reason for the Jan 06 jump in completions for your second plot?
ReplyDeleteThe ignorance of sheople who thought that our housing bubble was sustainable is nothing short of astounding, especially in hindsight as the unwinding is now underway. That ignorance was undoubtedly fueled by the thirty something crowd that was lulled into complacency by a decade abnormal economic prosperity. They were either too young or too dumb to be scarred by past recessions.
ReplyDeleteThe magintude of the transition from global boom to bust will be unprecedented as the damage from years of easy credit needs to be repaired.
It's too bad that greed and stupidity continued to drive our market beyond all levels of sanity after the party ended in the US a couple of yeras ago. The scary part is that Case Shiller work shows holdout areas falling much faster than leading areas....and the worst is still to come in the States.
We'l have to wait and see how this unfolds, but it could be one of those tales to file away for our grandkids.
I am stunned by the resiliency of starts. I mean, by now I would have expected either a) buildings or b) their bankers to have pulled the plugs.
ReplyDeletetant pis.
Just will make for a bigger pile of inventory to work off come 2010-2011. And that is a very big pile.
The US Gov had to bail out agencies to bring the mortgage rates down.
ReplyDeleteAnd who's going to bail out Uncle Sam?
Higher rates for treasuries are inevitable as the Chinese et al are going to be unwilling to take on more US debt at current rates, and instead will buy US hard assets. And that means higher rates across the board in the US, and likely here as well.
I have to echo VHB's amazement that starts remain as high as they are. I guess, thankfully for the builders, their monthly starts didn't go any higher than they did, but jeez, you'd expect them to pull back a bit given the ongoing market conditions...
ReplyDeleteBut I guess if you're a developer, you develop...
This is worth a laugh
ReplyDeletehttp://tinyurl.com/4bpj4z
metaldwarf, thanks for the link.
ReplyDeleteYou nailed it patriotz.
ReplyDeleteHigher rates AND recession.
No RE market has ever survived such a lethal combination.
Hang onto your hats folks!
Mike, credit goes to
ReplyDeletewww.threepanelsoul.com
"I am stunned by the resiliency of starts. I mean, by now I would have expected either a) buildings or b) their bankers to have pulled the plugs."
ReplyDeleteAccording to ECON 101, a 5-10% reduction in price means more demand, right? Freako and a few others on RET found some comments from local builders indicating as much -- a "minor problem". If Pastrick and his perpetual increasing price model is any indication of lender mood, I expect the taps to stay open until some serious BKs start appearing.
Build, my pretties, build. Hehehe.
I work in the construction industry and deal with a lot of the development companies around town.
ReplyDeleteIt takes about 2-3yrs to organize the pre-construction phase. This is where most of the developers time and money is spent. Construction is really the last 1/4 of the process. With a certain amount of momentum, it may just not be worth halting the whole process.Once all the funding/permits/approvals/NIMBY groups have been dealt with, it's pretty much clear sailing. Remember, even in March '08 things were not looking so dire (at least not around the lower mainland). Even though the Bear Blogs where grumbling the actual data showed otherwise. The tables turned remarkably quick. It's only been a few months since the listing to sales rate plummeted. I know some developers who have put later phases of a project on hold and will tough it out with a completed first part.
These guys have to appear to be solid. They can't be flaking out at the first sign of difficulty, that would destroy their business.
Besides, they mark up 300%, which gives them some flexibility.
The high number of starts is just lag. The slippage will start in spring '09 and be way down by autumn '09 and nonexistent after the Olympics.
The apparently slow response of developers reminds me of a great explanation of exponential growth by David Suzuki. Who pointed out that within a finite system where there is steady and constant growth, "the end" happens sooner than you think.
ReplyDelete"I am going to show you why it is suicidal to think we can keep growing forever. Let me give you a test tube full of food for bacteria, that represents our world. I am going to put one bacterial cell into that test tube (representing us), and it is going to divide every minute; that is exponential growth. So at time zero you have one cell; one minute you have two; two minutes you have four; three minutes you have eight; four minutes you have 16. That is exponential growth and at 60 minutes the test tube is completely full of bacteria and there is no food left, a sixty minute cycle.
When is the test tube only half full? Well the answer of course is at 59 minutes; but a minute later it is filled. So at 58 minutes it is 25% full; 57 minutes 12½ % full. At 55 minutes of the 60 minute cycle it is only 3% full. So, if at 55 minutes one of the bacteria said to its companions that they had a population problem, the other bacteria would be incredulous because 97% of the test tube would be empty and they had been around for 55 minutes. Yet they would have only 5 minutes left."
Just replace bacteria with developer and testtube with Lower Mainland and Bob's your uncle.
This may be a bit of an inappropriate analogy, but it seems to work. Kind of.
RE: Canadian government subsidies to mortgage industry to improve affordability:
ReplyDeleteDept. of Finance Lowers Minimum Credit Score to 600
The Department of Finance's new insured mortgage rules arrive on October 15. Originally, they were supposed to mandate a 620 minimum credit score. This has now been reduced to 600 after discussions with industry stakeholders.
They've also eliminated the 45% total debt service (TDS) maximum, and replaced it with a "principles based approach" according to CAAMP.
Source: Canadian Mortgage Trends
igor, interesting find. I think at this point any small changes to the new guidelines will have a minimal impact on the market. Prices relative to rents and incomes are too high and need to drop, significantly. Full stop.
ReplyDeleteIt certainly shows that lenders are still in a lendin' mood, obviously still wanting to touch the 600 credit scores, though many only with a HazMat suit I'm sure.
RE: Canadian government subsidies to mortgage industry to improve affordability:
ReplyDeleteUm not quite, now about this:
"Canadian government subsidies to mortgage industry in attempt to prevent return to affordability"
Better?
"Improving" affordability is the key. It will be used a lot by the industry.
ReplyDeleteI do not think subsidies will have much impact on the market as the inventory glut will bring the prices down, but it shows the trend of extending lax credit standards to keep the game going a little longer while builders try to unload the product.
There are lots of construction loans (not securitized by CMHC) burning builders pockets...
Good point, Igor, about needing to prop up the market so builders can dump product before pockets are burned by construction loans. One correction, though. The pocket being burned will be the issuer of that loan, not the builder.
ReplyDeleteUltimately it will be bank's problem to write down non-performing construction loan, but not before all the juices are squeezed from the buyer and developer.
ReplyDelete