Commentary: Contagious fear can cripple the Vancouver market

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Vancouver’s residential real estate segment is no stranger to rumblings of a bubble, but recent developments have dialled up the fear to a fevered pitch that might threaten the stability of the entire market, according to an analyst.
 
In a September 2 piece for CBC News, markets observer Don Pittis noted that ever-rising prices along with B.C.’s newly imposed 15 per cent property transfer tax on foreign buyers have led to much consumer apprehension. Vancouver’s August sales volume went down by 23 per cent month-over-month and 26 per cent from the previous year, while the average price of detached houses plummeted by nearly $300,000 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,” Pittis wrote. “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.”
 
Pittis added that the trend of buying with borrowed money, especially in a prevailing environment of cheap credit, might see a sudden halt and reversal in the near future due to the domino effect of investor departure and lower prices.
 
“[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,” he explained. “Price changes in markets happen at the margin. That means new entrants to the market set the price.”
 
“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.”

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