Thursday, January 15, 2009

Olympic Sized Depression Hitting Vancouver

Western Canada had a lot going for it during the recent credit boom. Not only were debt spigots open wide like nearly everywhere else in the world, pushing up asset prices along with them. But the provinces of BC, Alberta and Saskatchewan all had their own commodity booms at the same time, further fueling the demand for housing. In BC the mining (and to lesser extend forestry) industries underpinned a robust economy. In Alberta, the rising price of oil made previously uneconomical tar sands projects profitable. And in Saskatchewan, skyrocketing fertilizer, grain and uranium prices created their own boom in major cities.

More so than anywhere else, the boom story in Western Canada felt legitimate. So even if the rest of the world were to undergo a contraction of sorts, this region would be supported by it's "strong fundamentals." This relative feeling of safety provided the boom mentality even more fuel than elsewhere. Unemployment got as low as 3-4% in some areas, redefining what most economists thought was "full employment."

But Vancouver had yet one more factor providing wind at it's back. They had "won" the right to co-host the 2010 Winter Olympics with Whistler (a nearby ski resort town). The resulting inflow of foreign investment was going to put the city "on the map" in terms of major cosmopolitan international cities. Tokyo, London, New York, Milan, Vancouver. Yes. It was ordained. The International Olympic Committee had declared it so. The provincial government even began an advertising campaign with the slogan "The Best Place On Earth." Old license plates bearing "Beautiful British Columbia" are now exchangeable for new ones with the olympic logo and the new slogan - for a fee of course. All of this is symbolic of a peak atmosphere of social mood. People were made to feel extremely lucky just to be part of such a place. As such, property values needed to reflect this newfound prestige. And of course, "there is only so much land."

Or so went the story.

Unfortunately, Vancouver residents have been shocked to learn over the last few months that gravity does indeed apply to them also. Sure as the sun rises, boom has turned to bust. And perhaps nowhere in the world has it manifested so spectacularly as in Vancouver. Where social mood was highest; it has furthest to fall. Here are the recent happenings:

BC Legislature to be Recalled for Special Session

The B.C. Legislature will be recalled for a special session to deal with Vancouver's request for permission to borrow more than $450-million to complete the troubled Olympic Village project.

Without legislative action, the city would have to hold a referendum to approve the borrowing - an option Mayor Gregor Robertson said would cause costly delays in dealing with the situation.

"They need a tool right now that they don't have without a legislative amendment," the Premier [Campbell] said.

"We will bring that in as soon as it's drafted. We'll bring it in. We'll take it to the House, and hopefully it will pass as quickly as possible."

Mr. Campbell said he hopes members will get beyond "traditional politics" in order to deal with the matter.


Vancouver's Credit Placed On Watch Due to Olympic Village Project

An independent credit rating agency has placed Vancouver on a credit watch and may even downgrade the city's AA+ rating as a result of potential debt coming from the beleaguered Olympic Athletes Village project.

Standard & Poor's on Tuesday issued a bulletin about the city's finances, saying the impact on the city's debt could be significant if it borrows money to fund the remaining construction of the village.

"We believe that there's going to be an event in the next three months that will have a negative impact on the city's credit profile," Stephen Ogilvie, an analyst with the agency, told CBC News.


Nortel Woes Could Hurt Olympic Sponsorship

Nortel Networks was already financially flailing when it signed on as sponsor of the 2006 Winter Olympics in Torino, Italy.

It was laying off workers in 2007 when it became a major sponsor for the 2010 Games in Vancouver and struggling to stay afloat when its deal with the 2012 Summer Olympics in London was announced last July.

Now that the company has filed for bankruptcy protection from its creditors, Nortel's sponsorships at the next two Olympics could be in jeopardy.


Only through incredible incompetence or incredible arrogance could a struggling company think it is a good idea to spend millions on sponsoring a circus every few years.

The olympics in Vancouver-Whistler are turning out to be an unmitigated disaster. All of the planning going into the preparations assumed that economic expansion was a given. There was no contingency for a worldwide business slowdown. Surely, the economists they had hired assured them that no such thing had any statistical probability of occurring, and therefore wasn't worth planning for. This arrogance was prevalent regardless of numerous olympic experiences gone awry over the decades (the Montreal 1976 summer games had debts only repaid 30 years later, in 2006).

I'm guessing the attendance figures the olympic committee have assumed will also turn out to be wildly optimistic and revenue for the games and small businesses alike will turn out to be far lower than expected.

I'll give my readers two guesses as to who will be paying for this financial disaster, but you'll likely only need one.

Elsewhere, the global credit unwind and commodity collapse have real estate prices reeling in Vancouver. Vancouver is the former home of the TSX-Venture Exchange. It is the largest collection of junior mining exploration and development companies. Most of those companies are still based in Vancouver. During the commodity boom, these companies absolutely exploded in value. Very few of them actually made any money. But the prospect of finding a huge resource deposit was enough to give many of those companies significant value. Now, with commodity prices 70% lower and credit markets basically closed, many of these companies are gravitating toward zero. Cash in the bank is disappearing fast and without financing, they are essentially holding companies for mining permits that have little hope of ever being used. The wealth lost in the collapse of these shares has been exceptional, especially when you consider much of it is contained to one city.



During the boom, company executives, investor relations representatives, even secretaries were paid modest salaries plus stock options. The tremendous wealth effect this had was a contributor to Vancouver's housing boom. Now it too has all but disappeared.

In only 8 months, home prices have fallen 19%. And the massive amount of speculative supply that was bought in anticipation of flipping it post-olympics is awaiting the market for the spring. This has all the ingredients for a spectacular crash of epic proportions. Already, wise property developers are trying to front-run the market.

On Sale: $350M of Real Estate in Lower Mainland

A Vancouver real estate developer is making an unprecedented move to offer a liquidation sale of $350 million worth of its condominiums throughout the Lower Mainland.

The marketing strategy by Onni Group of Companies is aimed at selling off hundreds of condos in its inventory.

About 375 unsold condominiums in cities such as Richmond and New Westminster will be offered at 20 to 40 per cent off, a real estate insider told CBC News.


Only time will tell whether those discounts will be sufficient to draw enough buyers. Judging by the absolute collapse in social mood, I don't know where the buyers are going to come from. Nearly everyone who could come close to affording a condo (and many who couldn't, to be sure) already bought one in the fright campaign of run-away prices. "If you don't buy now, you'll never be able to afford one," was common advice.



Prices of nearly everything got so out of control, that there is no telling where the bottom is on this market. The chart above traces out some very clean Elliott Wave patterns, which would suggest prices are heading all the way back to their "Wave 4" trough of '98. That would be a 50% decline from the peak - surely even more for condos in super-speculative areas (the Olympic Village, for example). How will the forthcoming property tax hikes affect prices? Will the inevitable post-games service cuts by the city make Vancouver an undesirable place to live in the future?

We are once again confronted by a region that thought, "It's different here." It wasn't. It never is. Speculative booms precede busts, just as inhaling precedes exhaling.

21 comments:

EconStudent said...

Matt,

I think you are right on about a 50% correction in Vancouver housing market. When investments become speculation, speculation overshoot on the upside but correction could go below the downside. I think 75% correction might be possible in some areas. 1 million dollar for a 2500 square feet house in Coquitlam is ridiculous.

When do you think the correction might bottom out?

Anonymous said...

this is a great blog -thanks for writing your thoughts

Matt Stiles said...

Anonymous,

Thanks for the comment.

EconStudent,

I would say prices should "naturally" bottom in 2011 or 2012. But with government inevitably stepping in to prop up prices it is something that could easily drag on for another 5 years after that - thus making the nominal price decline larger as well.

Rock Trueblood said...

Excellent post, Matt. I'm adding your blog to my Honor Roll for Blogs at www.a1anews.com and also at rocktrueblood.blogspot.com

Keep posting, brother . . .


Rock Trueblood
Key West
Another island where it isn't different

Flyboy said...

Great write up! You make a brief reference to Alberta. Would you care to comment on your thoughts on the future of the Alberta market? Thanks.

Matt Stiles said...

Gracias, Sr. Rock!

Flyboy,

I am not nearly as familiar with Alberta as I am with my home province, so any opinion I have would be even less valuable than otherwise.

Having said that, I would venture to guess the same forces are at work in unwinding themselves. The generally accepted "cause" of rising prices is not always true. That is, the rising price of oil could have had very little to do with the real estate bubble in Alberta. It was more than likely just a byproduct of lax credit standards and an increasing willingness for society to take risks - something that happened nearly everywhere. Nobody really knows how much impact it had. Probably more in some places than other (Ft. Mac, for example).

Therefore, I would be careful with jumping to the conclusion that if oil were to rise again, real estate will automatically follow. The social aversion to debt and consumption could ultimately overcome any such forces. And after seeing the price of oil fall so dramatically, I find it hard to imagine people will "believe" any rise in prices again - at least for a long time. So that potential catalyst is likely dead and gone.

Other factors to consider are demographic. Who are all the aging boomers going to sell their houses to?

That's the best I can think of for Alberta. I'm sure there's other factors to pay mind to...

Regards,
Matt

EconStudent said...

I read on Garth Turner's blog that if you foreclose a house that used a 0% down guranteed mortgage, you will be sued by the government entity CHMC or the respective insurance company.

Do you know anything about this? How would this play out in the Vancouver market?

Matt Stiles said...

I know nothing about that.

But I don't think 0 down mortgages were all that popular in Canada. I could be wrong on that though. I wouldn't be surprised to hear they were more common in commercial financing.

max said...

Matt...so Vancouver will receive a giant loan for the Village...then it will own it....versus for example Toronto, requiring $$$ to support all its unemployed manufacturing citizens.

No argument there is a condo glut...but do you believe Vancouver's ex pat Iranians and established Asian citizens will sell then pick up and leave back from whenst they came?

You forget to give a little insight that Van has become a "SAFE TO VISIT" destination city and the trade middleman between Canada/US with Asia.

Eastern Canada/US is suffering bigger time, trade with Europe is dying.

You forget that the world still needs food, potash, uranium and commodities.

You simply underestimate Western Canada.

Matt Stiles said...

Max,

"You forget that the world still needs food, potash, uranium and commodities."

These things have nothing to do with home prices. That's the point. We have been an exporter of all of those things for decades. That has never prevented home prices from tanking enormously in the past. It won't prevent it this time either.

Best,
Matt

Sup? said...

0 down 40 year mortgages were introduced in 2006 and removed Oct 08. I read some stats that said they were being used in approximately 33% of all home sales. Hence the government removal.

Nice post Matt, well articulated piece about how we got here and where we're headed.

Anonymous said...

Very enjoyable and accurate write up about the craziness that was Vancouver for the past 5 years. The phrases "real estate always goes up", "everyone wants to live in Vancouver" and "there is no more land" were pervasive in Vancouver. I lived in Vancouver from 2001 to 2007 and I just didn't believe the real estate hype. I learned to keep my opinions to myself, as any talk of a potential downturn in Vancouver real estate was frowned upon or laughed at.

Hello Birdy said...

Great post. Somehow I feel a bit war and fuzzy about the Hard Left taking the city council and Mayor's chair at this time. These guys will have a real problem giving away money to the druggies, aggressive pan handlers and other street losers that make Vancouver a cesspool with a view in that, you can't give away money with credit you don't have. Perhaps a lot of governments at all levels have this lesson in store for them.

I don't mean to let the idiots of other political stripes off the hook, they are worse when it comes to wasting money. However, the recipients of their largess are mostly invisible and not a nuisance to the man or woman on the street.

How about central Vancouver Island? I keep thinking that housing went up there but not as much. I also think the "island" will have continued appeal to those retiring Boomers who are still looking to get out of the frigid parts of the Dominion.

There are many who already have a lot of dough and the price of a house in the right location will still be a quick and good buy for them.

Finally, we should all remember that the Olympics is the sports arm of the United Nations and is for the world elites not the regular folks. We should not be supporting that cause in the first place.

Jeff Cosford said...

Consider if u will the influx of chinese immigrants to Vancouver. Now some 45% of the population. Most of whom are considered wealthy.

How much of that wealth is dependent on the Hang Seng (Hong Kong stock market) that has collapsed. And what portion of their influx contributed to Vancouvers inflation.

Also Greedy Mayors increased the housing densities of most cities and municipalities in and around Vancouver with out matching infastructure improvements to handle the increased housing densities these density increases were of course to increase the tax base without added improvements to roads and such so now Vancouver is in perpetual grid lock with almost a quarter of the population just having learnt how to driver in the last 5 years,

Can you say disaster.

EconStudent said...

Sup? : Most subprime mortgages in the US were issued in 2005 and 2006. A very short period and I am worried that 0% mortgages will cause the same problems in Canada.

Jeff Cosford: Many Chinese families only put their money in the bank, but I am sure some put them into the stock market too. I know that it is fairly difficult to get a job in Vancouver unless you have connections. I feel some second generation Chinese people might move away from Vancouver. I am personally hoping to move back to Vancouver and get a finance related job there.

Anonymous said...

Pity no one in Vancouver recalled the crash of the early to mid-1980's when housing prices fell in half and unemployment rose to 13%. And in those days Vancouver had a more of a real productive economy i.e. one based on making and trading things, not the phoney economy of immigration, lifestyle and real estate development.

The smugness of Vancouverites led to an astonishing ahistorical naivete - they deserve what they get. I've been renting there for 10years waiting for this decline - the only thing that was not predictable was that it took so long.

Oh - and heard of any new mines in BC lately? Thought not - the aboriginal legal industry won't let you without paying danegeld. BC either gets real, or its economy is finished - snowboarders get what they deserve in the end.

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There are many who already have a lot of dough and the price of a house in the right location will still be a quick and good buy for them.

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