Fear and loathing in the Vancouver property market: Don Pittis

The subtitle of Fear and Loathing in Las Vegas, Hunter S. Thompson's best-selling 1971 tale of drug-addledadventure,is "A Savage Journey intothe Heart of the American Dream."

Scary comments in blogs and onFacebookand even incredible publications show a serious bout of fear and loathing inthe heart of the Canadian property-owning dream in advance ofthe latest figureson Vancouver property sales, whichwerereleased today.

• Metro Vancouver home sales fallafter tax
• Cooling the red-hotmarket healthier

"I tell you my friend, this is the American Dream in action," saysThompson's character to his attorney in the hilarious but distorted autobiography."We'd be fools not to ride this strange torpedo all the way out to the end."

Gonzoreal estate coverage

Thompson wrote something described as gonzo journalism,which, even more than other forms of journalism, left you puzzled as to what was true.

In advance of today's Vancouver real estate data, a number of reports seem to have followed Thompson's style, warning the world that Vancouver's strange torpedo of property prices whichas recently as June had risen 23.4 per cent in a yearhas come "all the way out to the end."

"Vancouver Real Estate Bubble Has Burst and Home Owners Are Panic Selling," says an article inCanadian Investor, adopting the fear-and-loathing style.

Backed by some truly horrifying statistics, Canadian Investor quotes former Lehman traderJared Dillian, who tells Canadians to sell your real estate assets, including your home, because you can buy themback in a few years for significantly less.

I should make it very clear that CBC doesnot endorse Dillian'sfinancial advice.

Wave of fear

But there is no denying awave of fear and loathing has hitVancouver's ebullientmarket in the wake of the provincial government's tax on foreign buyers. Data collected by realtor RobChipman shows that not only sales but average prices seemed to be falling.

The real estateboard's actual figures releasedFriday showed exactly that. Sales in Greater Vancouver fellin Augustby 23 per cent from the previous month and were down 26 per cent from August last year.

The average price for a detached home plunged by almost $300,000 in a month to $1,470,265. Average prices for condos and apartments fell by muchless dramatic amounts. Average prices, of course, can mislead.The MLS composite benchmark price, which the real estate board considers to be a more accurate indicator of price trends fortypical properties,was pretty flat rising bya modest0.3 per cent from July.

In the property market, where the mood of individual buyers matters so much, there is no question that fearand loathinghavean effect.

By tradition the two great forces in speculative markets are greed, which makes people buy, and fear, which makes them sell.

In highly liquid stock markets, experienced institutional investors act as an anchor on wild market swings. But the housing market is not liquid. And the majority of tradersare inexperienced amateurs.

Fear may make speculators, especially those in debt over their heads, want to sell. But when markets are on the way down, potential buyers are hit by loathing, not wanting to be the ones left holding the baby as prices fall further.

The downside of leverage

Leverage buying on borrowed moneywhichpropelled markets to new heights, goes into reverse.

Leverage is why you can make so much money in real estate when you have a mortgage. Your equity, the amount of the house you actually own, may be $100,000 or less. When amillion-dollar property rises by 23.4 per cent, the profit on the small share you actually ownis stupendous. No wonder speculators were interested.

But when property prices are falling, leverage becomes a serious disadvantage, and speculators may be wise to try to get out before prices fall too much more.

• When foreign buyers abandon Canada
• The danger of popping a foreign-buyer bubble

Price changes in markets happen at the margin. That means new entrantsto the marketset the price. Even if foreign speculators represent a relatively small proportion of buyers, those additional new buyers have a disproportionate effectinpushing prices up.

Bursting bubble

But as HilliardMacbeth, author of When the Bubble Bursts, told me last year, that can go into reverse "literally overnight."

Even in such emotional times,owners who think of their house as a long-term home are unlikely tojump into the market, especially if they bought before the worst of the speculative frenzy. They will not take Dillian'sadvice.

But fear and loathing can be contagious. If pricedeclines end up following Vancouver sales decline, there is no reason Toronto won't catch the bug. Even lower-priced properties such as those on the Sunshine Coast or in southern Ontario could notice the effect if big-city sellers no longer have windfall profits to downsize out of town.

Even the most enthusiastic real estate bulls know that20 per cent annual increases in property prices donot continue forever. The question is whether what we are seeing now is a short-term correction in isolated parts of the market, asoft landing, or the popping of the property bubble that so many critics have predicted.

Sometimes it is hard to tell what Hunter S. Thompson is talking about inFear and Loathing. But perhaps "too weird to live, and too rare to die" was referring to the Canadianproperty market.

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More analysisby Don Pittis