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-addled adventure, is "A Savage Journey into the Heart of the American Dream."

Scary comments in blogs and on Facebook and even in credible publications show a serious bout of fear and loathing in the heart of the Canadian property-owning dream in advance of the latest figures on Vancouver property sales, which were released today.

• Metro Vancouver home sales fall after tax
• Cooling the red-hot market healthier

"I tell you my friend, this is the American Dream in action," says Thompson'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."

Gonzo real 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 — which as recently as June had risen 23.4 per cent in a year — has come "all the way out to the end."

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

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

I should make it very clear that CBC does not endorse Dillian's financial advice.

Wave of fear

But there is no denying a wave of fear and loathing has hit Vancouver's ebullient market in the wake of the provincial government's tax on foreign buyers. Data collected by realtor Rob Chipman shows that not only sales but average prices seemed to be falling.

The real estate board's actual figures released Friday showed exactly that. Sales in Greater Vancouver fell in August by 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 much less 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 for typical properties, was pretty flat — rising by a modest 0.3 per cent from July.  

In the property market, where the mood of individual buyers matters so much, there is no question that fear — and loathing — have an 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 traders are 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 money — which propelled 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 a million-dollar property rises by 23.4 per cent, the profit on the small share you actually own is 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 entrants to the market set the price. Even if foreign speculators represent a relatively small proportion of buyers, those additional new buyers have a disproportionate effect in pushing prices up.

Bursting bubble

But as Hilliard Macbeth, 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 to jump into the market, especially if they bought before the worst of the speculative frenzy. They will not take Dillian's advice.

But fear and loathing can be contagious. If price declines 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 that 20 per cent annual increases in property prices do not continue forever. The question is whether what we are seeing now is a short-term correction in isolated parts of the market, a soft 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 in Fear and Loathing. But perhaps "too weird to live, and too rare to die" was referring to the Canadian property market.

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​More analysis by Don Pittis