Housing Bubbles Are Dangerous, That’s Why Canada is Finally Trying to Tamp Down on Them. And the US?

Wolf Richter with Jim Goddard on This Week in Money:

The underlying dynamics are similar, but the approach is different.

Home prices experience a historic spike in Seattle, and sharp increases in other metros, but prices of condos in New York fall. Read…  The Most Splendid Housing Bubbles in America 
 

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  30 comments for “Housing Bubbles Are Dangerous, That’s Why Canada is Finally Trying to Tamp Down on Them. And the US?

  1. Eric
    Aug 5, 2018 at 11:06 am

    Wolf, here is at least one real world data point from Walnut Creek CA. I commented on late May that I was listing my 4BR/3BA 3,000 square foot home in located 30 miles east of San Francisco and I was worried that I may have missed to apex of the bubble. The home is nicely remodeled but nothing special (in my opinion). It did show very well and the pictures made it look great. Listed for $1.295mm. I thought that was too low, but agreed to list at that prices to “attract more buyers.” The first person that looked at offered me $1.425, all cash and a two week close. I countered at $1.485 and they accepted. For some perspective, a almost perfect comp (2 blocks away and same square footage) sold 2 weeks prior for $1.258. As a postscript I am renting a comparable home (3 years old, single story and nicer than the home I sold) for the ridiculous price of $6000 per month. I will be there for only one year. Thanks for great content Wolf!

    • Paulo
      Aug 5, 2018 at 12:21 pm

      My folks had a 4 bedroom rancher in Walnut Creek. 1/2 acre, fruit and olive orchards, in ground pool, vaulted ceiling, used brick highlights, etc. They sold it in ’68 for $48,000. Funny. They replaced it with a new home in the Cowichan Valley for $27,000…in ’69 (another 1/2 acre on a creek)

      The same place in a Vancouver suburb might be 2M today? More?

      Say what you want, as a long time builder I can say it was still just a dressed up rancher and more trend than a well built home.

      Right now, new construction on Vancouver Island is around $300/sq ft….for basic housing, property costs on top of that. In my opinion this is inflated by 30% just to pay the skim that prevades every aspect of our economy for buyers, builders, sellers, etc. Permits, unnecessary design add ons, engineer sign offs for plans any apprentice could draw on their lap top or kitchen table, universal septic requirements, inspections, etc. Where I live I see thousands of acres of vacant land in our valley. Hundreds of logging trucks haul old growth to tidewater, yet young people cannot afford a chunk of property. They are not allowed to construct a modest dwelling that could be improved, or added on to as they work into stability. I see retired people living in travel trailers on rural pads, or on their friends property.

      The system does not work for average citizens and getting established is harder and harder, every year. Something has gone very wrong in both our countries.

      regards

      • interesting
        Aug 5, 2018 at 12:44 pm

        “Something has gone very wrong in both our countries”

        The only logical conclusion one can draw isn’t that something has gone wrong, it’s gone according to plan…….$1.5 million all cash? This isn’t a dream, it’s a nightmare. And if things go bad, this very same person that is willing to pay that will get bailed out……..and they know it.

        • DarkMatter
          Aug 7, 2018 at 2:30 am

          All cash buyers get bailed out, really? I’d like to see that one.

        • Steve
          Aug 7, 2018 at 8:01 am

          Dark Matter, yes they can.

          Case in point, we recently sold our house in DFW. All cash offer to us with a 3 week close. The buyers, however, put $48k down and are leasing the property from the actual buyers. Presented as a sale/lease where a company pays cash to the buyer and leases the property to the buyer with a purchase option.

          Never seen this type of financing structure before in 35 years of buying and selling homes.

        • Steve
          Aug 7, 2018 at 8:02 am

          Pays cash to the seller. Too early.

    • Tom Stone
      Aug 5, 2018 at 12:33 pm

      Eric, you did well to get out at that price.
      I’m in Sonoma County and despite the fires eating thousands of homes last year and the difficulties in building ( $300 per Sq Ft sounds cheap), the market has stalled and prices have begun to drop.
      For the last month price reductions have skyrocketed an roughly one out of three homes that goes into escrow comes back on the market.
      They either don’t appraise or a condition issue comes to light during the inspection period and buyer and seller can not come to a meeting of the minds.
      Disclosure, I am a Broker Associate at C21 NBA ( And no, Suzanne does not do my research).

      • interesting
        Aug 5, 2018 at 12:47 pm

        ( And no, Suzanne does not do my research)

        Then explain to the rest of us worker bees how anyone can pay $1.5 million, all cash?

        • Aug 5, 2018 at 2:38 pm

          A large number of investors are buying — and not just the Wall Street kind. There is a whole gaggle of “fintech” startups out there with websites and apps, designed for tech workers with big bonuses and stock options, that allow them to invest in single-family houses around the country sight-unseen. Roofstock.com is one of them. This suits tech workers … becoming a real estate mogul just by using an app. The buying is easy. Renting them out is handled by local property managers.

          A whole industry of house flippers has sprung up that cater to this new market (internet or app-based RE investing). They buy anything, make it look nice, take a few pics of the property, and resell to these distant tech workers via these websites and apps that make it all possible.

          This kind of stuff only works near the peak of a bubble.

        • Aug 5, 2018 at 4:03 pm

          Ha, what timing! I just got an invite in my inbox to a 6-day conference on Silicon Valley’s “disruption” of the property market. It included this:

          “Want to tell you about SILICON VALLEY SAN FRANCISCO DISRUPTS REAL ESTATE (SVSFDRE), the six-day immersive action learning experience focusing on the extraordinary innovation initiative in the property sector. SVSFDRE is described in attached brochure; more info is available at….

          “Would love to have you present your assessment of real estate disruption to our group sometime during the week of….”

        • Max Power
          Aug 6, 2018 at 9:47 am

          Wolf, with respect to roofstock, yes, they make it very easy to invest and their tools are nice.

          The one thing I would caution folks against is that many, if not most, of the properties they have listed are in less-desirable locations within metro areas. People buying properties in areas they are unfamiliar with might not be aware of this. Now as long as the economy is doing well/unemployment is low this isn’t really a big issue but once the economy turns those areas you’ll probably experience more missing payments/tenants skipping out/higher vacancy rates than the better areas within a metro. Roofstock’s vacancy factor to account for this is 5%. That’s probably reasonable for good economic times but might not be realistic for properties in sub-par locations during more difficult economic times.

  2. GSH
    Aug 5, 2018 at 12:33 pm

    Paulo, it was by design. Record low interest rates for 10 years caused record asset price inflation. Wages did not keep up. So, there we are…

    • Paulo
      Aug 5, 2018 at 2:42 pm

      I agree, but the Polyanna in the Paul part of my name finds that really really hard to accept. I know many people are shits and can never have enough, but if a rising tide lifts all boats then won’t everyone benefit over time?

      How will any of this help a 1%er if there are vast hordes of angry citizens? The world is pretty small in these connected times and there are no places to really hide anymore. Gated communities and armed security forces won’t save anyone from retribution.

      What on earth will all of us do as automation proceeds? The meme was to be more leisure time and funds for all to enjoy a better life or at least have opportunities to work towards, instead, there is more deprivation and takeaways of what already exists. People are lining up for ‘McScrap Jobs’, and arguing about pennies while the rich increase their ‘entitlements’. I’m 63 and somewhat mostly on the sidelines, but my kids and nephews/nieces are running flat out trying to get ahead. It’s that life isn’t fair aspect, when it could be.

      • Memento mori
        Aug 5, 2018 at 4:42 pm

        Throughout history, without exception, whenever the income distribution got out of hack , the balance was ALWAYS restored through violent revolution or heavy taxation by the government.
        I don’t expect the former to happen here but won’t be surprised to see a Sanders type make it to POTUS in the next election.

      • Nicko
        Aug 6, 2018 at 3:53 am

        Global population will increase by 2 billion over the next 25 years, concentrated in Asia/Middle East/ Africa. There will be no shortage of easy money as many of these rising economies see sustained growth of 5-10%. Canada will continue being a safe haven country for the new rich.

        • MC01
          Aug 6, 2018 at 8:09 am

          Most if not all of those “rising economies” are built on rather shaky pillars, mainly what modern historian Kunio Yoshihara called “technologyless industrialisation” and economy growth brought along merely by population growth.
          Neither is a recipe for success but the system produces many “godfathers”, and we all hope they’ll come here to spend their money, no matter how won.

          Also allow me to say that if you haven’t seen for yourself Subsaharan Africa you cannot even begin to fathom what the future has in store for us all. The last time I went to Kenya I swore it would be the last, and so far I’ve kept my vow. At least for me the place is downright scary.

      • Mike Earussi
        Aug 6, 2018 at 7:39 am

        A rising tide only lifts the boats for those who can afford to own one. But the vast majority who can’t afford one drown.

    • Aug 5, 2018 at 6:26 pm

      Money searching for yield with zero money going into stocks the past 10 years. Most of it flowed into bonds, real estate, collectibles and precious metals.

    • Rob
      Aug 9, 2018 at 5:24 am

      What were these “record low” interest rates in Canada? I would not call them “low”.

  3. Bobber
    Aug 5, 2018 at 1:06 pm

    Housing bubbles are dangerous. When the majority of the population can’t afford a home and realize they never will be able to afford a home with a normal income, anger and resentment build to extremes.

    • Frederick
      Aug 5, 2018 at 2:22 pm

      No doubt about it I had a home and my anger got pretty intense Just from watching the illegals living 20 to a house were doing a job that in 1985 Paid me 35dollars and hour for 15 and that’s in 2012 Crazy indeed And all the greedy Americans who take advantage by hiring them Some of the reasons that I sold and got outta Dodge The US is no country for old white men

  4. OutLookingIn
    Aug 5, 2018 at 2:37 pm

    Too late.

    The global real estate bubble has popped.

    Open your eyes and minds. Look at and study the economic/political fundamentals, both macro and micro. Plain as day.

  5. Aug 5, 2018 at 6:31 pm

    If Trump can take down China with tariffs the housing markets in Canada, Australia, New Zealand and the west coast of America are history. The yuan is falling, their local stock market is down about 24 percent. All this means is the Chinese are now poorer outside their native China and the only real driver of real estate prices is gone.

    • MC01
      Aug 6, 2018 at 2:25 am

      Basically all real estate bubbles are local phenomena: outside buyers may contribute to sending prices even higher, but it’s always the locals who drive prices up in the first place.
      When the Spanish real estate bubble popped in 2010-11, there was a lot of finger pointing aimed at foreigners, chiefly Britons and Germans, for “dumping their vacation homes” but nobody mentioned that mortgage approvals in Spain between 2005 and 2009 were actually higher than in the UK. Since when do supposedly very rich German retirees need to take out a mortgage in Spain?
      All these modern real estate bubbles around the Anglo part of the Pacific Rim are not different: Asian buyers are a nice thick icing on top but the cake underneath is wholly domestic in nature.
      They’ll go down one way or the other, as they have always done, tariffs or not.

      • Aug 6, 2018 at 4:04 pm

        The locals in Vancouver make just under $40,000 Canadian a year. They can’t even afford a one bedroom condo in Vancouver on that salary.

  6. Rates
    Aug 5, 2018 at 7:13 pm

    No there’s hope. Savings rate has been under reported!!! Customers have double the money than previously thought!!!

    They can plough those into the housing market.

  7. breamrod
    Aug 6, 2018 at 6:54 am

    the fed will continue to raise rates until something breaks as always. Then those hot markets will decline by 40% as always. Then private equity will swoop in and buy for .40 cents on the dollar all foreclosed property as always. Nothing new here!

  8. sierra7
    Aug 6, 2018 at 9:54 am

    “The more things change the more then remain the same”!
    Thx for another neat article and the diverse comments!

  9. Maximus Minimus
    Aug 6, 2018 at 12:43 pm

    If the economy is built on real estate transactions, then every downturn in housing will result in economic contraction. At that point, the smart heads at the central bank will start stimulating the economy with what know: another round of easing. The doom cycle.

  10. Patti S
    Aug 7, 2018 at 6:41 pm

    Steve ,
    Home Partners of Smerica will buy your home for cash and then rent it out.
    They are big in Dallas, Atlanta

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