Friday, December 28, 2007

2008 Crystal Ball

Well, my crystal ball is broken but maybe yours isn't. I'm interested in hearing what everyone out there thinks about 2008.
Will the Vancouver area real estate market continue to defy fundamentals and continue on its heavenward ascent?
Will the Canadian and BC economy thrive through a US economic slowdown?
Will the stocks, bonds, cash, gold, real estate, or other commodities be a good investment in 2008? Which one will be the best?
I don't really think anyone can "predict" the future but we can make some educated guesses. Here are mine.
1) 2008 will be the year of turning for the local real estate market. I think we will see year over year declines by summertime - at least in the Fraser Valley.
2) The Canadian and BC economy will slow down dramatically in 2008. Labour shortages will be a thing of the past by the end of the year in BC.
3) I have no idea about the stock market but I think it will be another good year for growth stocks. I like value stocks always but will they go up in value this year? I don't know or care since I am just looking for bargains with good earnings and dividends. I think agricultural commodities will be a good investment among other commodiites. Financial stocks will probably not fair that well but could be good buys this year as they will be continually battered in the news.
Please DO NOT take this as financial advice as I always recommend having a diversified portfoli0 and a proper financial plan.


Paul said...

That pic is great LOL!

Yes this year could be one for the record books. Shock and awe, or... more of the same? Time will tell.

Arwen said...

Totally baloney, but for fun:

It will not be obvious until very late next year that haircuts are happening, but that they will be happening - especially in the bedroom communities. Fraser Valley, and the Pitt and Ridge and Rock feeling the sting, but a lot of sellers are not yet aware that the winds have changed. Things sit. Speculative voices moderate: "Real Estate does go down, but only by X%", where X% is what they can handle.

Inventory will build in Vancouver, but only minor drop in price by midsummer overall, maybe simply no price gains. Eastside inventory will build faster than Westside except for downtown condos... I think the West is beyond reasonable affordability even for the households with income in the top 10%: but I imagine the "hip urban speculators" of the Downtown/Yaletown circuit will look more like the Eastside than Westside owners generally. I think the Westside is somewhat less vulnerable to sale by necessity -- since owners on average may have more than just their homes as savings/holdings. Death, Divorce, and Transfer will be more protected for those who simply shift wealth around. Of course, this may not be true for the older hippies in Kits, who may be thinking of cashing out for retirement, and may therefore rush to the exits.

(Note to old hippies in Kits: Leave now with your 1.2million for a drafty and moldy special!)

Weaknesses will continue to be exposed as assignments are dropped; condo resales (downtown esp) slow and condo inventory goes up across the board by, say, 15%; the exits start getting clogged by mid-August and by the fall of next year the boosters are aware the market is flagging. The media gets its teeth into the "slowing housing market" story and gets all excited about how we're aping the American housing markets (which are now in their second year of flames.)

Those journalists are scolded in the media by the realtors for causing panic when the market is simply normalizing, and continue to point out the difference between the US and Canada. Someone actually does some investigative journalism and figures out how many of the local mortgages are based on self-reported income or other hinky measures, which gives us *some* clue as to what's happening, but not a complete picture, since Vancouver's truly a psychological bubble.

Then the earthquake hits. *g*

Paul said...

Weekly REBGV numbers are up on my site:

Happy New Year Mohican!

Mark Fenger said...

I think that prices will begin to deteriorate noticeably by the end of spring/mid summer. The few investors who are relatively aware of how near the top we are will enter the market and there will be a large downwards jump perhaps in fall 2008 or a little later.

Things will then stabilize at 5-10% less than current values as the 95% of specuvestors who are completely out of the loop buy the "bargains".

6-10 months later the next big slide will begin, at first many will just assume it's the same as the last time and the market will stabilize again but after a year of constant losses there will be a rush for the exits. Here is where the carnage begins, listings skyrocket, MSM begins reporting about how there doesn't seem to be a bottom in sight, RE agents are out on the street because nothing is selling, nearly all prospective buyers are waiting out the fall and thousands of specuvestors are selling off every asset they have in the hopes that they'll be able to sell something "next month".

Big jump in the local suicide rate and many of the 'chic' boutiques start to go out of business as their clientèle dries up.

Luxury car dealerships are awash with used vehicles and stay afloat by buying them low and selling out of province.

By 2010 things are at their worst, the economy is in the toilet, unemployment has broken decades long records and the curve is finally starting to flatten out a bit by the end of the year.

2011 Things bottom out. Houses that sold in 2007 for 1 million are selling for 250k. Many 'shoebox' condos are purchased at 15-20% of their peak price and some construction companies begin to specialize in turning two or three neighbouring units into one liveable sized unit.

2012 Return to normal, Houses that sold for 1 million in 2007 are selling for 300k. Nobody is eager to invest in RE and prices will probably remain stable for the next 40-50 years.

Patiently Waiting said...

My headline predictions:

March 2008: "Vancouver prices up only 8%"

November 2008: "Housing prices are falling in Vancouver!"
"0% financing for condos!"

Prices up 5-10% in Vancouver/Burnaby/North Shore/Richmond.
Prices are flat or falling in all other suburbs, with 10%÷ declines in Surrey/Langley/New West/Maple Ridge/Mission/Abby/Chilliwack.

March 2009: "Real Estate bust"
"Real estate agents seek new careers"
"Rent deals for young families"
"Residents complain about condo skeletons" (kicker: Developer goes under)

November 2009:
"Building industry seeks government help"
"Huge job losses in Construction trades"
"Condo investors go bankrupt"

March 2010:

"UN sends Special Envoy to Vancouver"

Stories about young families dominating homeless shelters. Drug addicts and transients in massive tent cities throughout the Lower Mainland, on any unused piece of land. Care packages arrive from Halifax and Winnipeg for all the families kicked out of foreclosed condos (both renters and former owners). The international media is here and spends more time focusing on Vancouver's social upheaval than on the Olympics.

"BC government slashes budget" Declares recession and politicians panic over Olympic cost overruns.

"Ontario-bound: workers leaving BC."

"Real estate agents, mortgage brokers, developers on trial."


"Federal government buys near empty condo towers"
After intense international pressure, politicians in Ottawa unite to resolve the BC housing crisis. Problem is, unlike in most of the US, squatters have a hard time occupying empty housing. Unless the government buys the foreclosed condo buildings, housing is denied to a large part of the population. Some trades get work finishing or completing abandoned buildings. Wealthy suburbs organize goon squads to push out homeless camps. Towns in the interior give homeless bus tickets back to Vancouver. Riots break out downtown, commercial districts are trashed. Olympic tourists demand better security, cower in hotels. Almost no volunteers arrive for Olympics, and the whole thing turns into a fiasco.

Nobody even talks about real estate anymore.

Patiently Waiting said...

Just to clarify, in Nov 2008 prices will be rising YOY but falling MOM in the City of Vancouver.

patriotz said...

2011 Things bottom out. Houses that sold in 2007 for 1 million are selling for 250k.

You're not going to see a nominal decline like that unless we get Great Depression II. More likely we will get 80's recession redux, with a 40% or so nominal decline at bottom and a real decline over 50%. And that was nasty enough.

Mark Fenger said...

"You're not going to see a nominal decline like that unless we get Great Depression II. More likely we will get 80's recession redux, with a 40% or so nominal decline at bottom and a real decline over 50%. And that was nasty enough."

On what do you base this opinion?

My opinion is based on curve analysis of the bubble thus far, rent vs price comparisons and income vs price comparisons with the assumption that this (like every other bubble in the history of man) will have an overshoot at the end before it stabilizes.

Mark Fenger said...


I think the problem you have and many others have in seeing where things are going is that "normal" is so far in the past in relation to RE that few people really can grasp what normal prices are anymore. I have said before and I still believe that 1987 is the last time Vancouver saw normal healthy residential RE prices. That translates to median detached today of 242k and I have yet to hear an argument for ANY appreciation beyond that number that doesn't rely on irrational behaviour.

freako said...

That translates to median detached today of 242k .

How do you arrive at this number?

M- said...

Drachen: I agree that psychology here is mostly broken-- nobody thinks it can really crash, let alone get to the levels that you're talking about. Heck, even I often doubt that the crash will come!

The last time we saw what I would consider to be "normal" pricing here is back in the mid-80's as that boom took off, and back in the mid-to-late 70's as that boom took off.

Thanks to the Hong Kong migration, our RE prices were floated much higher while much of the rest of North America was dropping in the early 90's. Instead, here we saw 5-10% annual increases. In 94-95, our HK-boom slowed, and we saw generally-flat nominal prices, with no significant drops. At the bottom of the last market, in 2001, we still hadn't dropped as far as I think that we should have to get to the true "value" of local housing.

I think there are a few psychological barriers that will be broken that will surprise a lot of people:
-Prices won't always rise significantly.
-Prices can drop.
-Price drops don't stop at only 5-10%.
-Price drops don't necessarily stop at 15-20%.

I think that, as the coming bust hits its worst point, we could be looking at abandoned condo construction sites, people realizing that there isn't necessarily an "inherent" value to real estate that it can't drop below, there will be some bank failures, and we'll see price drops of 50% or more.

I think we're positioned for an ugly fallout in the coming bust-- we have significant overconstruction, with lots of planned projects for which the property has been purchased and levelled, but for which permits haven't been acquired yet. We have a lack of tradespeople, allowing a huge supply overhang to develop, thanks in large part to the large number of workers that have been sucked into the mega-infrastructure 2010 projects, nearly all of which have to complete by the end of 2009.

As the 2010 projects finish, those tradespeople will be released to work on condo projects, allowing them to complete fairly rapidly, right around the time when condo prices will be in the beginning stages of their rapid falls.

Since the US problems will be continuing, our forestry industry will still be the pits. Thanks to the coming US slowdown, China's voracious appetite for our mined products will be reduced, resulting in lower metals prices and weakness for our mining industry. Aside from the two-week party in 2010, tourism will be the pits.

Foreigners will come to the city, see that it's a beautiful place (there are lots of beautiful cities in the world), and some will consider investing, but quickly reject that idea, because you shouldn't try to catch a falling knife. Foreign investors won't fall into the "it's different here" psychology because they don't live here (it's not unique to them) and they've seen what's happening in the UK, US, and they'll remember the Japanese experience.

And so, 2009 will be the first year of noteworthy drops, fall of 2009 is where we'll see the sharp edge of the falling knife, 2010 will see the major supply overhang completing, and massive price drops coming. Some new condo projects will be repurposed into rental buildings due to the lack of buyer demand-- we'll finally hit a price point where it makes sense to build rental housing. 2011-2012 will be the bottom of the fall, with real estate having broken every mainstream expectation.

Oh, and I forgot to mention: during this time period, the cost of borrowing for a mortgage will be increasing, as banks are tight on their capital requirements, thanks to losses on loans "secured" by real estate equity... Maybe we'll even see 10% interest rates for 5-year mortgages. Variable rate mortgages will be significantly lower, thanks to central bank loosening, but if inflation starts to take off, just watch as the BoC raises their overnight rate, letting variable-rate mortgages skyrocket...

Yes, I'm a doom-and-gloomer for real estate and the economy, but I wasn't always this way. Three years ago, I though RE was expensive, slightly overvalued, but close enough to reason that it was worth buying (I bought then, I sold this year).

Just watch, during the next couple of years there will be lots of people like me and my wife who try to take our profits when they see problems coming. Most of my friends who've bought are dissatisfied with their condos and looking for opportunities to get further ahead.

Phew, enough of a rant for New Year's Day!

mohican said...


that is a good read on things from my point of view as well.

I totally agree that 2008 will be the year of transition from bull to bear market and 09/10/11 will be the years with the big price declines for all the reasons you mentioned.

Mark Fenger said...

"How do you arrive at this number?"

Take the 1987 median detached price and factor in inflation.

freako said...

Take the 1987 median detached price and factor in inflation.

That is a good starting point, but it excludes the effects of population growth and densification. There are very valid reasons for real price increases in urban environments.

How has apples to apples apartments fared from 1987 on?

Also, are you suggesting that rents are artificially low as well? Because at $240K, a house renting for say $2200 would yield almost double digits.

Alpha_Bear said...

In keeping with my handle, I have to say that I believe that your predictions are all too optimistic, although Drachen comes close to getting it right.

Banks (many) will fail.

Bonds will not be purchased.

Stocks will crash to a small fraction of today's values.

Real Estate will become a swear word, not to be mentioned in polite company.

Gold will soar.

War might be the only growth industry left.

At least that's the way I see things turning out in the next few years.

Mark Fenger said...

"Also, are you suggesting that rents are artificially low as well? Because at $240K, a house renting for say $2200 would yield almost double digits."

Artifically HIGH you mean? Yes.

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