Saturday, December 29, 2007

Predictions and more...

As per Roger's suggestion, it's time to make some predictions. First one, December 2007. Second one, what's in store for 2008? Add your predictions in comments.

December 2007: YOY increase in sales volume, YOY increase in average and median sales prices around 10%-11% from December 2006, but month-over-month decreases in average and median sales prices somewhere in the neighbourhood of 6%, bringing us back down to October 2007-type numbers of $495K-$500K median and $550Kish average.

2008: I'm starting to believe, the more I read about the sub-prime stuff and the extent to which the Canadian financial industry is trying to avoid any economic damage, that a recession is highly likely to begin in the US in the first and second quarters. January/February are typically bad months for consumer spending. This Christmas season was disappointing for retailers around North America. I expect 4th quarter 2007 numbers to reflect this. Our economies are 70% consumer driven.

That said, I don't see the economic engine that is development in BC to slow down soon. I'll go on record to say that, while I want a correction to start this spring, I expect that YOY numbers will be flat, the spring will show "usual" 5%-7% price gains over 2006 spring month numbers, but a slow fall will bring prices back to "zero-appreciation" YOY.

Other news: I came across this interesting story on a US blog. Check it out, it is a long read, but entertaining and informative. Here's the background. And here's a notable quote:
Jimmy was a banker and in spite of that he was a buddy of mine. One of the few that didn’t have his head in the sand and instead of just trying to push loans through to get the commission, he actually cared about the likelihood of repayment. He was a brand new banker, and in being such was crippled by his idealism and integrity. One day, obviously frustrated he pulled me into his office, closed the doors and asked me, “Look, I need your help. What the heck is going on here?”

I said, “What do you mean?”

“Well, this business, these loans. They’re all garbage. The other bankers are bringing deals to the table that are worthless. Condo deals, town homes, and I’m not the economist you are, but I read your reports and I at least understand the market’s oversupplied. There’s no way those developments are going to sell. But their loans get approved anyway, meanwhile I’m getting yelled at because I’m not meeting my quota. It’s almost like they want us to bring in bad loans. It just doesn’t make sense.”

And then I realized what was happening. Jimmy was new.

Update: doesn't everyone want to live in Victoria anymore?


1. Saint John, N.B.

2. Quebec City

3. Charlottetown

4. Moncton, N.B., Kitchener, Ont. (tie)

6. St. John's, N.L.

7. Saskatoon

8. Regina

9. Winnipeg

10. Halifax

11. Vancouver

12. Edmonton

13. Ottawa-Hull, Toronto (tie)

15. Hamilton

16. Montreal,

Calgary (tie)

18. Victoria

Monday, December 24, 2007

T'was the night before Christmas

Courtesy of Roger:
'Twas the night before Christmas,
when all through the house,
Not a creature was stirring not even a mouse;
The For Sale sign was stuck in the lawn with great care,
In hopes that the buyers would soon be there;

The Realtors at the open house had all been fed,
While visions of commissions danced in their heads;
But the first buyer who saw the house on a map,
Said "I won't pay this price for a real piece of crap."

When out on the lawn there arose such a clatter,
It was another buyer by the name of Mad Hatter!
He had made a lowball offer with savvy and flash,
Tore open his briefcase and showed them the cash.

He said the asking price was far too high,
"It just isn't worth it" while heaving a sigh,
When, what to my wondering eyes should appear,
But this way under list offer from a buyer to fear.

With a building inspector so thorough and quick,
I knew in a moment, that I was feeling quite sick.
More home inspections that all sound the same,
I whistled and shouted and called them by name;

"Now ROOFER! Now, GARDENER! Now, PAINTER a mixin,
New carpet, new vinyl new hardwood we're fixin.
To the top of the stairs! To the top of the wall!
More work needed before the buyers will call!"

And then, in a twinkling, I heard VREB's news,
After fretting and worrying, this I could use.
As I lifted my cell phone, dialed and soon found,
That the bubble had burst with a big banging sound.

Their eyes how they twinkled! Their faces so merry!
New buyers now had a lower mortgage to carry.
The sellers all asked how low will prices go,
The real estate agents replied "we really don't know".

As I compose this real estate Christmas prose,
We all know that 2007 is about to close.
Next year the prices will surely fall,
So let me say;

All the best, all. An especially big thank you to Roger for the Christmas cheer!

Friday, December 21, 2007

All the best

We hope you all have a great next couple of weeks, celebrating whatever you choose to celebrate.

We've put our credit cards away. We've retired much debt. We see the writing on the wall for this bubble real estate market and this bubble economy.

Remember to drink a toast on New Year's Eve to prudence, rationalism and economic sanity.

We've learned much from your contributions over the past 11 months. Here's to our continued learning from one another into 2008.

Open thread for your topics.

Monday, December 17, 2007

Word Choice

It's so important.

How's this for spin:

Edmonton soars 15.1% YOY

Edmonton average house prices plummet a whopping $100,or 20% in just 6 months. May 2007, $426K. November 2007, $325K. I guess a lot of Edmontonians dreams of selling and moving west must be over.

Calgary up 13.3% YOY

Calgary home prices falling faster than a shooting star. May 2007, $487K. November 2007, $409K. That's $78K folks. Or 16%. But I know, I know, it's just 6 months. The use of average price information can be useful in establishing trends when applied over a period of time, i.e. six months or longer. The Calgary Real Estate Board cautions that an average price does not indicate the actual value of any particular property.

Yes, I cherry picked these stats. Yes, these cities rose fast and furious. Yes, their rates of increases were higher than Victoria's. But they didn't rise anywhere near as far. Nor did they account for the fact that more people, with more money, live and move to these two towns, more frequently and at a higher rate than ever they did come to Victoria.

I can't help but wonder if we'll see the same panic selling here, like we do there, when we get 2-3 months of consecutive declines here?

Saturday, December 15, 2007

A few ramblings

A few people I know just closed on houses this week.

One couple bought a $400K "investment property" up island. It has two units, so "double cash flow" as they call it. Their monthly hit to income after they collect "expected" rents = $700. Sounds like a good deal to me, not!

Another group of three just bought an old house on a busy street. No Realtor could tell them the last time it was owner occupied. I actually lived beside this place about 15 years ago in a really disgusting 2-bed basement suite. It was a slumlord place back then and the same guy owned both houses. Nothing ever got fixed or cleaned. They bought this place because it has three suites in it. They will live in two of them and rent out the third. This apparently was their "last chance to get in the market." Parents gave them the 10% down payment. They paid over $450K.

Across town in an area best known for troubled teens and drugs, another couple bought a triplex (again unauthorized). 2 bed main suite with two self contained 1 bed units underneath. Cost? $540K.

People have lost their minds in this town. It really is irrational. None of these people looked at the state of the market or the greater economic trends. None of them care. They all think RE only ever goes up in Victoria.

I didn't say a word to anyone other than ask the question "Did you look at the market?" Their responses ranged from "my Realtor told me I got a great deal" to "RE always beats the stock market."

On another note, it seems as though the credit crunch is quickly spiraling out of control in Canada as the banks gave a collective FU to those that bought their should have been junk- bond rated ABCP over the past several years.

Here's why you should care about the credit crunch:
Canadians are already getting hit in the pocketbook by the debt-market crisis, and it could get a lot worse.

"It could get a lot more difficult for consumers to get any type of mortgage loan or any type of personal loan," as debt markets tighten up," says Fred Lazar, a professor at the Schulich School of Business at York University in Toronto, sounding a wakeup call for consumers dulled by the big numbers and ugly acronyms of the steadily escalating credit-crunch story.

"I would compare what's going on now with the onset of the Depression period in the late 1920s and early 1930s," says Steven Hochberg, chief market analyst with Atlanta-based Elliott Wave International. "The potential is for it to be a lot worse simply because of the amount of credit outstanding." The total credit-market debt as a percentage of gross domestic product is more than double what it was during the Great Depression, he says.

For about two months now, the banks have been quietly reducing the discount they provide on mortgages. Canadians now negotiating a variable rate mortgage can get .60 percentage points off the prime rate. Two months ago they were getting .90 percentage points off.

With prime at 6%, the difference between a mortgage rate of 5.4% versus 5.1% could mean almost $15,000 extra in interest on an average Canadian home over 25 years (based on a 10% downpayment.)

"Appraisers are saying, 'I don't want this to come back at me.' If the appraisal comes in under purchase price, the purchaser says 'I'm paying too much, I want out,'" he says.

The last thing you want to do is expand your debt obligations. "This means hard times. It remains a reduction in the standard of living as everybody gets their house in order. It's going to be the way it used to be," says the market analyst.

some fallout from the ABCP crisis has already been felt with the $1.2-billion University of Western Ontario pension plan for 6,300 faculty and staff restricting redemptions on some of its funds in early November.

"They were doing alternative lending with high ratio mortgages -- that part of the business might dry up," he says, referring to people with little equity and lots of debt. And the market to buy that securitized debt is disappearing.

Sunday, December 9, 2007

US equivalent of CMHC?

From here.

In a pair of moves that might once have seemed too cynical even for Washington, it looks like policymakers have decided the cure for a crisis created by too much cheap credit offered too long is very simple: Extend the terms, encourage more borrowing and have someone else foot the bill.

It's the financial equivalent of the hair-of-the-dog "cure" for a hangover: a big interest-rate cut from the U.S. Federal Reserve next week and, as just announced by President Bush, a massive bailout plan for distressed U.S. mortgage holders.

Have we completely lost our common sense? Is it really desirable to provide easier money to people and companies that got into trouble by abusing their access to money in the first place? And is it really a good idea both to cancel mortgage bondholders' contracts for the sake of an adjustable-mortgage-rate freeze and to provide a couple of years of grace for stressed-out home borrowers who are likely to eventually default anyway?

I don't think so. It's as if the U.S. Federal Reserve and U.S. Treasury believe the best way to treat heroin addicts is through long-term, government-supplied crack. To be sure, lower interest rates and a U.S. mortgage-rate freeze might ease borrowers' pain temporarily, but they do nothing to solve causes or habits -- and without a doubt launch a new cycle of abuse and dependence.

Building bad habits
Unfortunately, this is pretty much the history of U.S. economics in the past decade. We call ourselves a free economy but repeatedly let the government intervene to make sure that no one who votes gets seriously hurt. As a result, individuals who make bad choices -- from U.S. Gulf Coast residents who build homes in the path of hurricanes to low-income citizens who take out expensive loans for overpriced real estate -- are rescued time after time in well-intentioned but misguided programs such as the one the Bush administration has cooked up for foreclosure-facing U.S. mortgage holders and their lenders.

What has to irk you is the disparity between who wins when things are going well and who loses when things go sour.

When banks make a lot of money, after all, they suck down the profits by giving their executives and boards outrageous pay packages worth tens of millions of dollars, justifying their actions under the rubric of entrepreneurship. And when the opposite happens? They beg taxpayers for a handout.

Veteran observer Satyajit Das has disdainfully called the financial industry's attempt to patch over its problems with taxpayer funds the "socialization of losses." It's an approach that may sound good to politicians in an election year yet is not only morally bankrupt but will also merely delay the ugly final reckoning for companies, individuals and policymakers alike.

Postponing the undeniable anguish involved in making participants own up to debt-fuelled losses is exactly why it took Japan more than a decade to shake off the bursting of its own credit bubble back in 1990. Interest rates were cut essentially to zero, but because moribund banks and real-estate tycoons were given government stipends, they drew funds and attention away from more-productive uses, and the country entered a recession that haunts Japan to this day.

Broken promises
The program proposed by U.S. Treasury Secretary Hank Paulson -- hammered out in round-robin meetings with U.S. mortgage lenders and borrowers' representatives in the past few weeks -- would freeze interest payments on hundreds of thousands of adjustable-rate mortgages for three to five years.

That sounds nice, but here's the catch: Rising interest rates were contractually promised to the mortgage lenders, which then passed along that promise to companies that bought the loans as part of asset-backed securities and associated derivatives.

Though the rate freeze would be awesome to a mortgage holder in Muncie, Ind., who wants to get out of his adjustable-rate obligation, it sounds terrible to a pension-fund manager in Munich who isn't getting the income stream he paid for, as well as to the mortgage-servicing company that won't be getting its own piece of the future income stream.

The breaking of these obligations will not be free. Foreign investors will demand a higher "risk premium" to invest in U.S. real estate, which will make it more expensive for future mortgage seekers to get loans. And they are bound to sue to get the payments they thought they were owed, which will drive up mortgage banks' expenses.

Moreover, American courts and bureaucrats will be tied up for years in a struggle to define exactly who deserves loan forgiveness. People who are making payments on time will naturally demand to get something out of the deal -- why should they essentially suffer for being responsible? As the cost of the bailout goes up, there's little doubt that U.S. state and federal governments will float bonds to pay the refinancing fees and, of course, interest payments on those obligations will be paid by all citizens.

Economist Martin Feldstein, a former Reagan administration official, told Bloomberg that among other problems, the plan would forever change foreigners' perceptions of U.S. investments. "What are they going to think about investing in American securities in the future if the government can say, 'Well, you thought these were the interest rates and the contract, but we're going to roll that back now, and you'll just have to settle for less'?" Feldstein asked.

Dr. Frankenstein's debt monster
When you start working your way though the ramifications, you may begin to understand why I called the great de-leveraging of America a very big, very long-range problem in this column back in September -- not something that can be ignored or wished away. Debt that was created, distributed, leveraged and re-leveraged by a factor of up to 30-to-1 over the past 10 years by financial Dr. Frankensteins has wormed its way into every corner of our lives and will alter the way we do business in ways we are only beginning to understand.

Indeed, everywhere you look now is evidence that the subprime-debt crisis is morphing and expanding like a creature in a horror movie. Just this week, we learned from hearings in Congress that strapped credit card companies such as Capital One Financial and Bank of America had begun to soak customers by jacking up interest rates on balances for the slightest changes in their credit profiles.

If Americans so much as apply for a new credit card, according to testimony gathered at the hearing, the current card provider can boost rates as high as 30% per year. This is not the kind of fee-generation method that card companies would normally like to pursue, but they have been pushed in this direction by losses elsewhere on their balance sheets.

In another morph, Americans scrambling to pay rising mortgage rates on houses that are declining in value are also punking out on their auto loans, student loans and home-equity lines of credit. According to a Lehman Bros. survey, 4.5% of auto loans issued in 2006 to well-qualified borrowers were 30 or more days delinquent through the end of September, up a whopping 3% from the previous month. Lehman said that was the largest single-month delinquency leap in eight years and that auto-loan delinquency rates are now the highest in a decade. Meanwhile, 12% of subprime auto borrowers are delinquent on their 2006 loans, according to Lehman Bros., which is the most since 2002.

Any solution that attempts to solve these issues by cutting rates further to allow people to borrow more will only drag out the effects. It will also force solvent taxpayers to foot the bill for their less responsible siblings and neighbours, a divide that will cause political strife we haven't yet begun to fathom. All of this may ultimately work out in the fullness of time, because Americans are forgiving and generous people. But in the meantime, financial stocks are likely to continue to suffer, so continue to avoid them even as they fitfully rally over the next weeks. They are likely headed much, much lower, as their fundamental value recedes with their profitability.

Not quite the same as CMHC of course but do we not see the similarities, especially when companies like this are actively promoting the sub-prime products and taking advantage of tax-payer backed insurance schemes.

Wednesday, December 5, 2007


Like any boy-band marketing worldwide, last months RE stats scream of manipulation. As does any rationale of why the F@%& the BoC would lower rates this week. Insanity. I don't understand why so many scientists are coming out against the IPCC and UN-led global warming hysteria these days yet very few economists are coming out against the ridiculous monetary policy emanating out of central banks all over. My guess is things are really bad. They just haven't hit yet. Look out.

Anyway. Patience bears, patience. We looked at a property this week. Even with our connections in the development world, a pre-approved mortgage, an agreed upon subdivision from one 36,000SF lot into three massive 12,000SF lots, one with a house on it, we couldn't make it economic. And we weren't the only ones as the previous bidder walked away too. This is going to get ugly. Anything worth developing is already priced as if it were.

When I see VREB stats and feel sad, I look at sales at Tuscany Village, Richmond Gate and the Pearl on Hillside, not to mention the Julia... I suddenly feel better. While their competition on the lower mainland sells out in 8 hours, our products, in the "land everyone wants to live on" can't hit 80% sold in 16 months.

I believe we are witnessing the dead cat bounce.

Sunday, December 2, 2007

Are your lights on upstairs?

We're talking inflation this week. It's a much bandied about subject around here. I believe it is significantly higher than the 2-3% the BoC likes to claim. Apparently I'm not alone:
Good investors check things out for themselves as Ronald Reagan recommended when he dealt with the Soviets: "Trust, but verify."

To take a concrete example: What do you think is the level of inflation? This is critically important, both if you invest, and if you plan for your retirement. In the case of investing, the rule of thumb is that the proper market price-to-earnings multiple is 20 less the inflation rate. So if inflation is 3 per cent, a PE of 17 times is reasonable. On the other hand, if inflation is 10 per cent, as it was in the late '70s and early '80s, then even a PE of 11 or 12 would be too high. As for retirement, no need to elaborate on the need to figure just how far your dollars would go in your golden years.

So, you may ask, what's wrong with taking Statscan's consumer price index figure? That number usually ranges between 2 per cent and 3.5 per cent. But is this the real inflation figure? No it isn't. In fact, the government says so specifically - although in very small print: The CPI is merely a measure for indexing civil service employees' pensions.

Seymour Schulich, in his wonderful book Get Smarter: Life and Business Lessons, says that in his experience, money loses 90 per cent of its value every 30 years. For example, a La-Z-Boy chair for the TV that costs today $2,000, had cost $200 about 30 years ago. A house that had cost $50,000 30 years ago, would cost today $500,000, and so on. A growth of 10 times in 30 years comes out to about 8 per cent a year.

Therefore, the best indicator for food inflation I have found is the price of yogurt. Yes, that simple, plain food item that - unless you buy it flavoured - is about the same everywhere. Since I have a good memory for prices, I know that eight years ago my family paid 29 cents for one of those little plastic containers of yogurt. Today we pay 79 cents. (You'd probably pay $1.29, but I am a value buyer.) This comes to 2.7 times the price in eight years, or a growth rate of 13.2 per cent a year!

How high is real inflation today? It is certainly not 3 per cent a year. Even if it is "only" 6 per cent, the market's PE is too high. But if inflation is really 8 to 10 per cent a year, then the market next year may see some reckoning, because its PE is way too high.

So why does everyone figure on inflation of 3 per cent a year, 3.5 per cent, tops? Because, as you probably realize by now, few people bother to check things out for themselves. Most rely on printed numbers and stats, instead of opening their eyes to physical reality. If you, on the other hand, start checking things for yourself, very soon you might know what no one else does - and could take advantage of it by acting on what few others see.
Kind of reminds me of when I talk RE with my peers. They keep saying the market has no where to go but up. They keep saying all the Realtors keep telling them so. And CMHC. And VREB. And the TV. And the Newspapers. Funny that.

VREB numbers should be out tomorrow. I'm thinking that the October numbers will prove to be a downward blip. I think, just from watching the low-end that prices will be up from October, but still below September's high. Sales will be the highest seen in November.

As an aside. I read that Schulich book two weeks ago. It's a great read. No chapter is longer than 5-6 pages. Well written, good thinking, plain lessons.

Friday, November 30, 2007

Are the lights ever on?

Drive down through the Songhees or "Humboldt Valley" at night and one thing is very striking, all these new luxury condo developments have no one living in them.

It seems this issue isn't isolated to Victoria. A great article in the Straight highlights the Vancouver situation:
  • For the 15 years between 1991 and 2006, the city grew by about 106,000 people.
  • The city also grew by about 69,000 housing units.
  • At 2.2 people per unit, that should have accommodated 151,800 more people, which could have created the conditions for a housing glut and falling housing prices.
  • Instead, housing prices doubled over that time period.
  • In 2006, there were 4,736 new housing units completed in Vancouver–the most in a single year since 1995.
  • The vast majority of those were in eastern downtown and the East Side.
  • Strathcona, Kitsilano, and Kerrisdale received the fewest number of new housing units.
  • In 2007, 3,294 new condo units will have been completed in downtown alone.

Sources: City of Vancouver Housing Centre; Statistics Canada; Canada Mortgage and Housing Corporation

My only issue with this report is the 2.2 people per unit average. I find it hardly likely that the number is 2.2; I'd bet it's closer to 1.7 as I doubt there are anywhere near as many 3 person (2 adult + child) households as there are 1 person. Anyway. It's telling non? When you go back over the historical time frame of 15 years and you offset the current influx of people with the 7-9 years of out-migration in the 90s, you get less than 1% growth in total, yet you see 5-6% (my guesstimate) growth in units available.

Perhaps this is the key information for Vancouver:
"Empty housing stock is very difficult to estimate," he said. "BC Stats has previously undertaken some analysis based on hydro usage, which indicated that four percent of all downtown apartments were identified as unoccupied in 2003, with eight to nine percent of condo apartments included in that number." In addition, he said, the 2001 census found that 2,600 downtown apartments were unoccupied.
So much for 0.5% vacancy rates, eh? When the market shows signs of cracking, think you that those owners of the empty places will be keen to hold onto a losing "investment?" Victoria is in the same boat, to a lesser scale, but I'd say the percentages of vacant properties are likely higher here.

As an aside: I haven't been around much lately I know. I actually have, but just not posting. I had let this blog get the better of some of my emotional common sense and decided a little break was necessary. I appreciate the discussion that happens here. When it tapers off as it had over the past month or two, I take it as a sign that my rants are not doing the readers, or me, any service. I'm not yet sure if the break is over.

Monday, November 19, 2007

Collusion in Canada?

I have a friend who is a CFA. We had an interesting conversation that led me to do some digging. He asked a simple question when we were talking about ABCP and how good a deal some US financial stocks are compared to their Canadian peers: "have you noticed how the banks aren't announcing write downs on the same day?"

I hadn't. But what would it look like if they did?

Today, National Bank Financial, the smallest of the Big 6, announced the biggest write down yet: $575 million. It's stock went up. It holds $2.25 billion worth of worthless paper. I'm guessing the other mortgages haven't reset yet?

Anyway, here's what they all have written down thus far:

NBF: $575 million
CIBC: $463 million
RBC: $360 million
BMO: $275 million
BNS: $190 million
TD: nada

Total: $1.863 billion

Now that barely equals the RBC quarterly profit thanks to yours and mine bank fees, so no sweat right? Wrong. Why do they simultaneously announce profit taking, like, say, selling off Visa and Mastercard assets to mitigate their reported losses? Because investors don't like any losses. Period. They panic. And sell. And panic and sell and panic and sell. You get my meaning.

Things are only just starting to get ugly for our friends down south. Citi, the world's biggest bank is rated by some as a "sell" stock today.

Our banks meanwhile, thanks to an assumed lunch date between bigwigs several weeks ago, decided in their wisdom to announce write downs little-by-little; and that's exactly what they did too, the smallest losses were announced first to numb the greater pain announced today. The situation is not rosy here, no matter what any of the so-called economists would have you believe.

Dodge was in South Africa over the weekend, where he hinted a rate cut would be necessary. This will only fuel the inflation that is already much higher than reported in N.A. 2010 could easily prove to be as disastrous as 1981.

Of course, none of this has anything to do with real estate (sarcasm intended) so carry on people.

Thursday, November 15, 2007

Truth in Advertising

I was minding my own business today at lunch. Idly munching on a sandwich reading the weekly Real Estate marketing newspaper's condo section when something dawned on me. It was like a bright light on a gray day, as if the clouds opened up and a single beam of sunlight had penetrated through creating my own little private opening of Highway to Heaven. What was this brilliant insight, you ask?

Truth in advertising. It's missing from the real estate market. But it's law in the securities industry. Why isn't truth in advertising required for the "investment" that is constantly being pumped in this town?

Case in point: The Julia is having a hard time selling out right now. The ad in question states "priced below market value to sell out the project." How can something be priced below market value? It simply can't. Market value is the value the market will bear and the only time somethings' market value can be determined is at the exact moment that it is sold. And market value is constantly changing as a result.

So they could have written priced below assessed value. Except that they haven't been assessed yet. They could have written priced below appraised value. Except appraised value has nothing to do with investing. And these "marketing systems" are about making me think I'm going to be rich by buying this over-priced 2-bedroom condo.

Market value tells me that there is a market for this product and the price will fluctuate. Telling me that I can buy a unit below market value is the same as telling me that I can buy the unit today and sell it for more tomorrow simply because I got it for less than market value. Which is clearly not true.

I also noticed that there are a number of Rennie wannabes springing up in this town. It seems every Realtor with a condo listing is somehow an owner of a Marketing System TM.

At one point in time in the BC Legislature a normal citizen could enter a bill for legislation to make a law. I'm not sure if this is still possible, but I believe it is time for all investments to be subject to the same disclosure laws as securities. I can see the headlines when the market turns "Angry citizens outraged by guaranteed investment salespeople, used to be known as Realtors."

Wednesday, November 14, 2007

Tuesday, November 13, 2007

I need your vote

Which logo do you like best?

This one was designed by for another project not associated with this blog or writer, and has been offered up for use here.

Or we can stick to this obviously amateurish effort at creativity:

Which may or may not infringe on the BC Government's trademarking of the Spirit Bear.

Monday, November 12, 2007

Little of this, little of that

Not much to say today. So I'll give you this: (H/T to Mohican)

On another note: Roger asked about personal anecdotes regarding buyer sentiment. It's been a long time since I heard anyone say now is a great time to buy. Anyone I know that has a home is reassessing their need to continue owning their present house. A few are looking at cashing out. Some, like my parents and their peers, are looking down south.

I know of one flipper (friend of a friend of Ms. HHV) who is having trouble selling his "updated" flip unit. He's lowered the price twice and is now considering, gulp, using a Realtor. The market has definitely changed. It could be seasonal.

It may not be though. Considering sales are higher in October 2007, the start of the traditional slowdown, I'm more inclined to think the price reductions in SFH has nothing to do with seasons and everything to do with affordability. I'm seeing a lot of "deal collapsed due to financing" on MLS. This means either the accepted offer came from someone who couldn't afford the joint, or the lending institution thought it over-valued, under-kept or just a lain old bad risk. I'm glad that for whatever reason, the credit market is tightening; it's good for the long-term overall health of the economy.

Check out this ad from Edmonton. Apparently now is a great time to buy when the developer gives you a money back guarantee that if the market value of your home is less than what you paid for it when you take occupancy, they'll refund the difference. I don't know about you but I'd be hoping that the sub-trades are too busy to get the jobs finished so my "refund" gets bigger. Of course, it will be hard to give back the difference in cash when the company is filing for bankruptcy protection which is what companies do when there is a run on them.

I wonder if we'll see ads like this in Victoria? I wonder if all those people that are expected to come to Vancouver/Victoria? and buy houses during the Olympics will still be coming when the 2008 economic slowdown expected everywhere but China turns to a recession in 2009? Maybe we'll get to see hockey games for less than $500?

Thursday, November 8, 2007

A sign of times to come (I hope)

Check this out: MLS # 235876.

This is a 2-bed plus den, 2 bath 1174 SF steel and concrete construction (1974) condo on Johnson St.

Original asking price was $239,900. It sat on the market for 49 days. It sold today for $198,500. That's a $41,400 reduction for 17.3%!!!! I haven't seen a reduction like that in the low-end condo market yet.

Now I know nothing about this building. It has a high monthly assessment of $295 which leads me to expect that there is work to be done, which is normal for buildings of this vintage.

Good work barbers, good work. Keep this coming.

Wednesday, November 7, 2007


We've made much of ethics in the past, and we'll likely make much of them again in the future, as we are about to make much of ethics right now.

Roger gave us a link in yesterday's comments that sheds some light on to the much-seen practice of re-listing properties on the MLS. When we see a property using our Realtor, we ask about this; but it was actually our Realtor who turned us onto the whole practice in the first place as this Realtor is honest and does the homework and tells us. Contrary to some beliefs, many Realtors don't like the way other Realtors operate, thus giving all Realtors a bad name. Anyway, point being, the Realtor has the information, and you have a responsibility to ask for it.

Here's the meat of the issue:
If a property is not selling the listing agent can, with permission of the owner, re-list the property on MLS. They pay a small fee, the property is withdrawn, and then re-listed back on the market and becomes a new listing. The history of the old listing is available to Realtors but not the public, except when you ask.

Re-listing can affect the statistics for:

  1. Days on the market
  2. Percent of asking price paid
  3. Canceled and withdrawn home
  4. New listings
This practice of re-listing can make the market activity look different. It could show a different trend then what is actually happening. It is deceptive in nature. It should not be allowed.

Here is an example of re-listing:

Jan 1 listed $800,000
March 1 Re-listed $700,000
May 1 Re-listed $600,000
May 15 sold $590,000
Days on the market 15
Percent of asking price 98.3%
Number of new listing 3
Number of withdrawn 2

Now here is the same house without re-listing:

Jan 1 listed $800,000
price adjustment $700,000
price adjustment $600,000
May 15 sold $590,000
Days on the market 136
Percent of asking price 73.75%
Number of new listing 1
Number of withdrawn 0

It is the same house but at the difference in the statistical results.
And this came from a Realtor (with minor edits from me). This same Realtor also talks about dual-agency. His explanation goes much further than my rudimentary knowledge on the subject. I was interested to learn that the brokerage and not the agent is the actual seller contracted. What this means is that two agents working both ends of the deal from the same agency are really in conflict and acting on behalf of the seller.

I can't think of any reason why a buyer would not want to employ an agent on their behalf. It costs you nothing and if you use one that has no business connection to the seller agency, then you presumably have one working on your behalf. They sign a contract. You have legal rights associated with that contract. Makes sense to me to use one.

Now what would we do if a property we wanted to make an offer on was listed by the same brokerage as our agent represents? We'd first have a conversation with our agent. Do we feel secure that our agent has our best interest in mind? Do we think our agent is selling to us? If we felt at all uncomfortable, we'd get another agent to represent us. Is our agent showing us a disproportionate number of properties listed through their brokerage? All of these are warning signs in our minds.

Agents work relationships. It's a networking thing. If an agent felt we were acting inappropriately by using another agent to make the offer on a dual-listed property, that agent isn't looking out for our best interests. And thus would never get to list our home when we sell it nor gain referrals to our friends and families. If the agent can't see this then they are too short sighted to be working with us in the first place.

I'd like to hear from other agents out there on ethics in their business. And of course I'd like to hear from you too.

Check out Mohican's place for a much better Rent vs Own argument than I've ever articulated.

Tuesday, November 6, 2007

Talk me out of this

I'm thinking about jumping in. Everyday on my drive to work I pass one of those "Real Estate license in 5 weeks signs," funny I saw one in Vancouver this weekend too, anyway, I'm thinking about jumping in to that pool. Not because I want to buy and sell real estate for a living, but because you have to learn to think like your opposition if you want to beat them at their own game. May as well get the training right?

Last month there were 1200 Realtors in Victoria and 708 sales for a sales to Realtor ratio of 0.59. The median commission for those 60% of Realtors fortunate enough to make a sale on a house was roughly $23,000. The agency takes half, leaving $11,500, minus advertising and expenses, and paying a share of the commission to the buyers agent, say $4K or so. I'm guessing that if a Realtor sold a house here in the median range they're pocketing about $6K.

But we all know that like all sales related businesses, it's the top 20% that do 80% of the business. I'm guessing that even though there were record sales here, there were also at least 50% of Realtors who didn't make a dime last month. I wonder what the turnover rate in RE offices are like these days?

Anyway, I've digressed. Anyone take the licensing course? Tell me what I need to know. This might be a fun winter blogging project. Maybe I can infiltrate the industry through the back door and expose the unethical practices that are going on? Is it still OK to be licensed and work a job outside the industry? Funny how few other sales-related professions allow this practice, think financial advisors etc. Anyway, tell me what you know.

When I sell my first luxury townhouse, I'll buy you all a bear. Oops, I meant beer.

Monday, November 5, 2007

Flipped right in half

I'm torn over flipping real estate. The entrepreneur in me doesn't fault anyone from making a buck on a service or product for which there is demand. But the ethical side of me finds fault in the facts that:
  • flipping artificially inflates property values because it temporarily removes units from the market reducing supply
  • flipped units are rarely subject to permits and inspections because most flippers are slapping paint, snap-flooring and tile over eyesores, not changing structure
  • flipped units come with no guarantees
  • flipping most often happens in tight sellers markets where subject to inspections can often be turned down because of hyper-demand and stupid buyers
Whenever we look through MLS we see empty units. Some are obviously the work of flippers, some are honest updates done by the previous owners. How can we tell the difference? Owners are less likely to do the work after they've bought and moved and more likely to do the work while they still live there. When we walk through a unit that is empty, has a new "kitchen, bath and flooring" including the aforementioned snap-lock flooring, stainless appliances, granite-look counter tops and $10 pot lighting, we can smell the flip.

What is a bear to do? Don't buy the flip job. Ever. The deal is in the sweat equity. Flippers, unless they happen to be contractors, rarely have access to the supply discounts. So this means they get their mark-up from doing the work on the cheap, doing it themselves, and selling for maximum profit.

You can beat them at their own game by not buying a flipped unit. If you must buy now, try and buy a good deal. Flipped units are never good deals. Buy the unit that needs cosmetic work. Do the work yourself. Take a vacation when you take occupancy and put a week into cleaning, painting, replacing worn flooring, getting new appliances and redoing kitchens and bathrooms. If the work you are doing is not structural, you can do it a lot faster than you think. Leave the finishing for last. But don't finish last by buying a flip-job.

If people stop buying the flips just because they look nice and start paying attention to the underlying economics involved, then the flipped units will sit, prices will come down and the 20-30% (our guesstimate) of properties that are currently sitting vacant will give the bump to the listings necessary to keep the downward momentum moving.

For what it's worth: we were in the US yesterday. Save yourself the time, don't bother looking there for good deals. All the numbers we were seeing in the malls were within $5-$10 of the ones we see up here. Even on the big ticket stuff. Real estate, that's another story. Anyone know if you can live in Blaine, Washington and work in Canada year round? If you can you can live for 50 cents on the dollar compared to White Rock.

Friday, November 2, 2007

Weekend Open Thread

Ms. HHV and I thought with the temperature so low outside, this weekend would be a good one to head over to Vancouver and get in line for the OlympicTM village condos. We figured we'd buy two or three and flip them this time next year so we'll have our down payment for our new Uplands house.

So while we're over in DreamlandTM.... here's your open thread. Please go easy on one another.

If you're a BC blogger or other web-person and you're so inclined, feel free to rip off the BC Real Estate Bear's Alliance logo on the sidebar (just do a right-click, save-as) or send us an e-mail and we'll e-mail the original to you. Reciprocal links are always appreciated.

Thursday, November 1, 2007

October Sales: Need's Analysis

Roger's words:

VREB stats are now out. More positive spin from VREB. Lets take a look at the facts.VREB in italics; Last months numbers in brackets.
  • The average price of single family homes sold in October was $556,222 (584,193); the six-month average for single family homes was $570,454 (572,007).
  • The median price was considerably lower at $495,000 (520,000).
  • The average price of all condominiums sold in October was $343,334 (341,014); the average for the last six months was $321,993 (318,198).
  • The median was again lower at $291,000 (288,500).
  • The average price of all townhomes sold last month was $407,031 (402,213); the six month average was $404,163 (402,246).
  • The median price was $369,950 (375,000).
  • MLS® sales last month included 375 (335) single family homes, 196 (150) condominiums, 79 (77) townhomes and 22 (21)manufactured homes.
  • There were 3,311 (3381) properties listed for sale on the MLS® system at the end of last month, down slightly from the 3,426 properties in the same month a year ago.

Now for the analysis:

1. Sales of homes and other properties in the Greater Victoria area soared 20 percent in October compared to the same month a year ago. There were 708 sales through the Victoria Real Estate Board’s Multiple Listing Service® (MLS®) in October, up from the 590 sales in the same month a year ago. There were 632 sales in September of this year. This is true but the tone leads the reader to believe that the market is still hot and rising. What is happening is that more buyers are buying houses at a price that is cheaper than last month!!

2. Meantime, prices for single family homes moderated somewhat while prices for condominiums and townhomes showed little change. Victoria Real Estate Board President, Bev McIvor, says the strong sales and stable prices show continued consumer confidence in the market. McIvor added that it’s normal for overall prices to fluctuate on a month-to-month basis depending on the properties that sell in a given month. “While the average price of single family homes moderated slightly last month, the overall average price so far this year is over seven percent higher than at the end of last year.”

Moderated somewhat - moderated slightly - stable prices !! The statement is true for condos and townhouses but the average price for single family homes dropped by $27,981 (4.8%) and the median by $25,000 (4.8%) in one month!! stable prices show continued consumer confidence in the market. Oh yeah - for those of you registered for real estate PCS you know that there are big price reductions every day and some nice haircuts given out in October. Bears - stay tuned - we are on a roll here. The cold weather and Christmas season are coming up fast. Next month sales will be down, lowballers will be active and the inventory is still high. I can hardly wait for the November and December numbers.

H/T Roger...

UPDATE: I'd just like to add how funny it is in a month that the average and median prices in SFH both dropped 4.8% that VREB decided to compare the average to the 6-month to make it seem less so of a drop. Ah, spin.

Wednesday, October 31, 2007

This is telling, non?

Castlegar News, Page 0024, 31-Oct-2007

Income Earnings – Where do you Rank?

By Debbie Pereversoff CFP, CSA

Last week, I searched the internet looking for interesting data from the good folks at Statistics Canada regarding retirement savings. I wanted to find out a little bit about income earnings. Specifically, how much money people make out there, and where do we as individuals stack up?

All the data here is for the 2004 calendar year, which is the most recent income data available.

Just prepare to brace yourself; we'll start with “median” total income. The median is the mid-point, where half the included population is higher and half is lower.

“Total income” in this case includes income from employment, investment, government transfers, private pensions, registered retirement savings plans and other income. What I found out was that the median total income for Canadians was…$24,400. If you made more than $24,400 in 2004 – congratulations - you were in the top half of income earners!

Now, before you calculate that fully half of Canadians work for less than $12.20 an hour, bear in mind that “total income” will capture part-time employees, after-school student jobs, etc. Those people will pull down the average with a low income that may not be representative of hardship. That being said, the bottom half of total income earners is also populated by people who are out of the work force and living on low incomes provided by pensions and government benefits.

Many of those people do indeed have financial hardship.

The median employment income for Canadians in 2004 was $25,400 - that's just counting the working folks. The highest median employment income by province was the Northwest Territories by a wide margin ($35,400), followed by the Yukon ($28,300), Ontario ($27,900) and Alberta ($27,500).

Newfoundland was the lowest at $17,000.

But let's move back to total income for Canadians, and climb further up the scale to see where the meat is. Let's move all the way up to where about 2/3rds of individuals have lower incomes. In 2004, you were in the top third of income earners if you made more than…are you ready? - $35,000!

I know what you're saying. Let's go higher! Okay, let's move up to the top quintile line. At this level of income, 80 percent of people made less than you – the number? – 19.8 percent of Canadians with an income made $50,000 or more in 2004!

Now, although a bit over 12 percent of individuals had incomes between $50,000 and $75,000, the atmosphere thins out pretty quickly above that. Only 7.6 percent of people had incomes of $75,000 or more in 2004. Only 3.4 percent made $100,000 or more. And by the time we get to the $150,000 or more category, we're down to just 1.3 percent of income recipients.

People with 2004 incomes of $200,000 or more were a rounding error: only 0.7 percent made $200,000 or more. And you can be 99.5 percent sure that any randomly selected Canadian earned less than $250,000.

OK - those are the stats for individuals. The nice folks at Stats Canada also track the incomes of various family groupings, so we can get an idea of where entire households compare by income. “Couple families” are couples (married or common-law, including same-sex couples) living at the same address, with or without children. No singles or lone parents are included. The median total income from all sources for all members of such families in 2004 was $64,800. Less than a quarter of such households had total incomes of $100,000 or more and just over 8 percent had incomes of $150,000 or greater.

So, there are the stats, and that's what we make. Now, consider some of the implications of this information. If there were folks who made $50,000 a year and didn't feel like they were making enough to get by (and there are), it would be useful for them to consider that based on 2004 figures, 80 percent of Canadians with an income actually make less than that. If their individual income was close to $65,000 – it would be enough to push them into the top ten percent of incomes, received by Canadians.

Ninety percent of the 23.4 million people with an income in Canada made less. If they felt they weren't getting by at an income level that's higher than that of the vast majority of the people, in one of the richest countries in the history of the world, do they have an income problem or is it a problem related to something else, like choices or expectations?

Looking at the statistics of what we all make, it sure gives you something to think about – doesn’t it?

Debbie Pereversoff CFP CSA is a Certified Financial Planner and a Certified Seniors Advisor with her company The Affolter Financial Group Inc. in Castlegar.
Unbiased by me for your reading pleasure. Comment away.

Monday, October 29, 2007

The Bear's Dilemma

Back in 2002 my friend whom I've written about before bought his first house. In 2000, his sister had sold a house she had bought in 1995 for a $30K loss, or 18%. My friend was nervous about the market. He'd had to over-bid to get his house and paid just about the average sales price for an average property in an average neighbourhood. He'd been able to put down a significant down payment and take out a 14-year mortgage for the rest. If the market tanked on him then like it had for his sister, he was confident his financing arrangement would help him weather the storm. Couple that with a fairly nice place that he and his new wife could grow into, and stay for some length if necessary, and his nervousness was abated.

Back then we were talking a lot about the stock market crash in 2000. We figured that, like most cycles in economic history, the bull market in housing was a direct result of capital fleeing out of risky equities into stable real estate. We both saw signs of economic growth in equities and figured that the local RE market wouldn't have legs to sustain the growth it had experienced over the past 18 months. I was decidedly bearish. He owned a house and of course didn't want to see a correction.

At that time, I was earning great money in a job I didn't want to do anymore. My dad was urging me to buy a home. I decided that a mortgage would be a life sentence to a less-than-satisfying job and decided to go back to school and get a university degree to open new employment doors. I could play the what if scenario forever here, so I won't. I don't regret the decision I made. Hindsight being 20/20, I realize I could have done both.

Fast forward to today. We have a rarely witnessed situation: parallel bull markets in both local RE and world equity markets. One seems to have endless legs, the other, I'm not so convinced. RE prices in the western world are correcting: everywhere except Canada. East of Manitoba, the market didn't have the heat that the West did, and manufacturing is getting hammered, so I believe the RE market will soften there very soon. West I don't know. I want to believe that Alberta will continue it's downward trend to a negative year over year loss. But I doubt it will. Currently it's negative month over month; it will take a massive hit for it to go below the 30% or so it had gained already this year.

So what is the Bear's Dilemma? Roger asked an interesting question over the weekend: "how low does the VREB published median price have to go before they jump in?" And that question my friends outlines exactly what the Bear's Dilemma is: when is low enough?

I've maintained on this site for some time that being an owner of a property is better than being a renter. There are many reasons for this:
  • pride of ownership
  • building of financial equity
  • flexibility and security in living arrangements
  • asset appreciation
There are well-documented-around-here downfalls too. But I'll state unequivocally that if you find a house/condo that you can afford--i.e, it fits under the 30% gross income shelter costs recommended by financial planners everywhere--you don't have to amortize over 40 years to make this happen, and you will be happy there no matter what the market does then now is just as good a time to buy as any.

The trouble for us is we can't find those kinds of places; either we'll be unhappy in the unit/neighbourhood for any great length of time or we'd be stretching our budget to the point where we can't afford to save for our other financial goals, like eating and retiring. So we wait for our income to explode or this bubble to burst. I wonder which will come first?

When prices start falling, how will we judge when is the right time to buy? All around us we're inundated with media extolling the benefits of buying property right now by telling us how good it would have been if we bought a year or more ago. When the market goes down the opposite will be true: societal reinforcer's--media and our peers--will be saying the opposite: "don't buy now you'll be losing money."

To which I state the only answer I can come up with for the Bear's Dilemma: "If you are happy with your purchase, you don't blow your budget, you don't compromise on your retirement and other savings, and you can live in the place you buy for 7-8 years or more, you will have nothing to worry about."

To answer Roger's question: for us, I figure that a 30% correction on the median SFH price in Victoria will give us the legs to get into the market and stay there.

Current median: $520,000
30% correction is: $156,000
New median: $364,000

Is this realistic? We hope so. If it's not, who knows what we'll do.

Friday, October 26, 2007


I've said before that I believe that information we get for free from someone who makes a living off of selling something should be taken with a grain of salt, especially when it comes couched as "advice."

I have a lot of respect for the accounting profession. Sure, they were partly responsible for some of the mess in the US and Nortel in Canada, but those are largely isolated incidents and aren't reflective of what kind of service an accountant can give an individual or family on a financial planning level.

The Institute of Chartered Accountants of BC released a recommendation during the recent BC budget consultations. It contains the most recent income and affordable-living stats for BCers.

Here's what they had to say:
Real personal disposable income per capita is the amount of income available after taxes and net of inflation. It illustrates changes in potential purchasing power and savings.

Financial vulnerability is measured by total debt (both personal and mortgage) calculated as a ratio to personal disposable income.

Cost of living is expressed as the percentage of household expenditure spent on basic shelter and reflects the trend in actual household purchasing power.

As a place in which to LIVE, BC enjoyed a decreasing crime rate and decreasing cost of living, increasing disposable income, and high government health care spending. At the same time, however, personal debt continued to grow (largely as a result of high housing prices).

There are, however, areas in which BC still needs improvement: disposable income ($23,339); personal debt (1.24); and cost of living, as expressed by the percentage of household income spent on shelter (20.2%).

When comparing 2005 with 2004, disposable income in BC grew by 1.5%, bettering the Canadian average growth rate of 0.9%. (MY ADD: we're still below national average; Alberta and Ontario beat us by 4.1% and 0.2%; and our disposable income to debt ratios almost twice that of the national average).

BC’s real per capita disposable income rate was 3% below the national average in 2005.

BC’s higher disposable income gain is attributed to the 10.3% cut in real direct taxes (MY ADD: not income growth!)

Financial vulnerability is measured by total debt (both personal and mortgage) calculated as a ratio to personal disposable income. BC’s debt to personal disposable income ratio rose by 6% last year (the highest increase in our comparison), reaching a record high of 1.24 and leading our comparison for the tenth consecutive year. This increase was primarily due to increased mortgage debt, which rose by 11.7% in 2005.

Vancouver is the least affordable city in Canada and the 15th most expensive city in the world. Owning an average home requires 42.1% of British Columbians’ (not Vancouver, that's BC-wide) median pre-tax household income. Not surprisingly, mortgages comprise 75% of BC’s total debt.

BC’s cost of living in 2004, as expressed by the percentage of total household spending on shelter, was 20.2%, comparable to Ontario’s rate of 20.5%. This is not surprising given that both provinces have the highest housing prices in the country. (While housing prices in BC are 25% higher than in Ontario, other costs, including taxes, water, fuel, and electricity are lower in BC). (MY ADD: That ratio must be dragged down by real rents).

BC has less post-secondary educated citizen's than Alberta, Ontario and is below the national average.

BC’s wages, adjusted for inflation, decreased by 0.5% between 2004 and 2005, dropping to $21.05 per hour as a result of strong growth in the wholesale and retail trade sectors, which typically pay lower wages. (MY ADD: that number, based on a 40 hour work-week and 52 weeks/year = $43, 784 gross annual average income).

The number of British Columbians working in construction trades grew by 16.7%
in 2005, which led to an increase of 4.1% in average hourly earnings in this sector from January to November 2005.
You can read the full report here. So much for wage inflation being the reason why housing prices are so high. I'm surprised that the COL ratio is so low. This is perhaps because I'm not an accountant or economist and don't understand the stats they used to come up with that. Or it's perhaps indicative of the fact that real rents are considerably lower than mortgage payments and thus drag the 42.1% ratio down to 20.2%? What do you think?

Thursday, October 25, 2007

Why this is actually irrelevant

Hence why they did it. H/T VG.

CMHC is an arms-length crown corporation. What this means is that they receive no government direction, and they don't, and that they receive little government funding, and they do; so they must be self-serving and self-sufficient, and they are.

I do agree with Mohican over at the Financial Planning Personal Sanity blog, it is nucking futs. But that said, I don't believe this will have any impact whatsoever on the Victoria real estate market. And here is why (Yes, I've purposefully picked the cheapest investment property I can think of):

2-bed 1-bath condo worth $200K with $1200/year property tax and $150/monthly assessment.

With a 0% down mortgage you'd be mortgaging $215K ($15K insurance premium to CMHC) for a monthly mortgage payment of:

Say you're a RE "investor," you take out this mortgage on this dumpy condo, you rent it out for market rates of around $1.25/SF. So you're getting around $1000/month. But you're paying out
$1222 in mortgage, $100 in tax, $175 in MA for $1497 or a $500ish loss every month. Let's say you squeak out a bit more for rent. You won't get $500, maybe $200. That's irrelevant.

The only "investor" for this deal is actually a speculator betting that they'll make their money in inflation and mortgage paydown. CMHC already ate up 7.5% of your inflation (before interest) and considering that condos are overbuilt and already coming down in price (new ones especially) I don't think we'll see too many banks willing to do this deal. So the "investor" will have to go to the alternative market which means they are paying more interest (not to mention that alt-mortgage funds are extremely threadbare with the credit crunch) and their already negative margins just got more negative.

Now this new product may have broader implications in other segments or markets, but in the local Victoria rental pool where rents are barely 60% of carrying costs for the most part, a 100% down mortgage makes no economic sense whatsoever.

Anyone stupid enough to get into this product deserves to lose their shirt when the market corrects. CMHC may get caught holding the bag, but the debtors get taken into bankruptcy first. The premiums that CMHC will charge are designed to make them money. Pure and simple. This is a huge risk that they are aware of; they built that into their business model. In other less-inflated markets, pretty much anywhere east of Manitoba, this product will be a big time money-maker with limited market implications. CMHC is facing increased competition, they got some free advertising today, I doubt if they got much else.

Wednesday, October 24, 2007

More reasoned than me

Further to last Friday's post, this letter appeared in the Kelowna paper today:
The Daily Courier (Kelowna), Page A11, 24-Oct-2007

History shows house prices will come down

By Mo Rajabally

This letter is as a result of The Courier's Steve MacNaull's Home out of reach' piece (Oct. 16) and Damon Enns' letter 'Home aren't out of reach...' (Oct. 18).

The intent is to caution any person who may think it is now or never time to own a home. I have lived in this valley for 32 years, and I have observed the ebb and flow cycle of real estate. It is not a line that goes straight up indefinitely. At most, it plateaus and perhaps gradually, it comes down.

The backbone of any economy is the middle class. I would like someone to tell me if this class has had a 10 per cent pay raise per year over the past five or six years.

This is how much the value of real estate has appreciated in Kelowna. When I read the statistics Irene Wilkinson of Express Mortgage Services provided (Courier, Oct. 18), I shudder. Now that the price of a home has jumped over the $500,000 mark, what will be the average mortgage with a 10 per cent down payment?

And, how could a young couple with two incomes pay a monthly mortgage of over $2,689? What happens if there is an accident, an illness, a transfer, or worse still, a loss of a job, not to mention an interest rate hike?

I remember being told in 1988 by a real estate agent if people didn't buy a home then, they would never own one.

Soon after, the market had peaked and I had sold my home. I rented for a year. The following year I bought a lot half the asking price when it came on the market in 1988 because the market had taken a plunge.

It is going to happen again; at least this is what I think, but perhaps not to the same extent. I would request any economist/statistician from UBC Okanagan, or Okanagan College, to do the math.

Of all the baby boomers retiring all across Canada, what percentage would retire in Kelowna?

Also, how many people in Kelowna have cashed in on their house equity and have moved on to cheaper locations?

Everywhere I go, I see apartment buildings, townhouses, and single-family homes under construction.

Will they all be sold at the asking price? Well, it depends on what the market will bear. There is always the possibility some developers could end up holding a bagful because they have missed the last ferry.

The one thing we have going for us in Canada right now is low interest rate and a solid economy.

Recently, MP Garth Turner, visited the Valley. I used to read his investment newsletter and even read his column in one of the local papers.

He warned Kelowna the boom could not continue. Frankly, one does not have to be a rocket scientist to know there is always a goal post and that the sky is not the limit, except perhaps if you sell real estate.

I would, however, caution any prospective buyer to make his or her own decision and not to rely on my observations and comments.

Now I believe in the process of writing this letter, I have created a problem for myself.

Will I find a real estate agent to sell my home? Well there is an open invitation.

Mo Rajabally,
Mo, I'm guessing you'll have line-ups of Realtors wanting to sell your home. I'm pretty sure that in your neck of the woods they've been too busy selling homes to read the paper.

Strathmore condos in Langford dropped their prices today.

Tuesday, October 23, 2007

What would it look like if we bought in 5 years; Redux

Condo time. Yes, you did just hear me swallow. I've made no pretenses about my apprehension with condos. To me, you're much better off being a renter than an owner of these types of dwellings. I won't get into those details, rather, I'll get into the analysis.

For this one, we had to go waaaaay back. Check out MLS# 225591. It's an older unit (pre-leaky), it hadn't seen a stitch of work in about 25 years. It was downtown, but not "Central Park" or other less than sunny sides of downtown. We'd only consider a downtown condo. In our hunting experience, they don't hang around long, so we'd look at this as a more liquid purchase than a lot of others we could make in this market.

Original ask was $229,900. It sold for $225K. We'd put 5% down and pay cash for closing costs. We'd also have $10-$15K for "updating" which this particular unit needed in order for us to feel good about the purchase. For full disclosure, we actually made the call to put in an offer on this unit after watching it for 3 weeks, but it had a conditional offer accepted that day. That was March 2007. And we're relieved.

Here's what it looks like for us:

We'd pay bi-weekly rapid. Even with taxes, monthly assessment, and bills, we'd fall well under the recommended 30% of gross income (we'd actually be 30% or less of net) which is just fine. On this purchase, we'd even likely go 5-year closed variable which would save us 0.1%. Not much, but it adds up and we can easily handle a 1%-2% interest rate hike.

So what does this look like 5 years from now? Again, we'll make some assumptions similar to yesterday.

Here's the 6% growth side:

Present value (actual): $225,000.
Future value (assumed): $301,100.
Difference: $76,100.
Mortgage principle paydown: $23,500

Total equity: about $100K.

Wow. I am honestly surprised. My risk is roughly half of what it was yesterday. My equity is only $60K less. That's like a kilometer to a mile really. OK. No it's not. But for barely being a blip on the risk factor side for us, I'd say a $100K equity in 5 years is a pretty good return. Too bad I know people who have hit that mark, with less risk, in less time, in better condos, over the past 3 years, and therefore tainting my expectations and those of everyone around us. But I digress.

Let's look at the downside now. There was some reasonable debate about my assumptions on the period 1994-1999 in town. I'm OK with that. Condo's on VREB aren't counted until 1995. So I have to shift my 5 year period ahead by a year. So we'll use downtown units from 1995-2001.

1995: $152,000.
2001: $145,000.
Difference: $7K or a whopping 5%.

This basically means you lost money. But not that much. You'd even come out ahead with equity on the principle pay down to the tune of almost $16K. If we did the upgrades of $10-$15K we figure we'd get 50 cents on the dollar come sale time (conservative) so we'd probably even break even.

I won't be commentating for a while, we're out condo shopping.

OK. No we're not.

What would happen if the condo market dropped 6% annually?

Present value: $225,000.
Future value: $149,000.
Difference less principle paydown: $52,600.

If it was only a 3% drop over 5 years?

Present value: $225K.
Future value: $186,500.
Difference less principle paydown: $15K.

Maybe we'll wait till we sell the place to do renos? Then we'd be even. Or maybe not.

Again, I've left out the taxes, MA and other expenses. This isn't a who wins the wealth war post. Just a little math playing around analysis for you folks to rip to shreds.

Monday, October 22, 2007

What could it look like in 5 years if we bought today?

I'm going to revisit a purchase plan on a SFH. I'm going to use an MLS listing that has sold, but I think we'll see more of these types of sales situations so it may be indicative. Or it may not be.

Here it is: MLS# 231005. Original asking was $419,900, it sold after 108 days for $371,000. I picked this one on purpose; if we went after a house we'd be looking for a "motivated seller" so this fit.

Anyway, here's our particular economic situation with it: 5% down, 25 year amortization, 5.85% locked-in over 5 years. It looks like this:

We'll pay bi-weekly rapid. We won't overpay our mortgage because we prefer to max out our RRSP contributions. Any disposable income left over will go into other investment products, not the mortgage. You can debate the intelligence of that, but at relatively cheap money (5.85%), paying down the mortgage isn't huge on our priority list. We anticipate feeling comfortable in this house in this neighbourhood for 5 years.

Assumption Scenarios
Growth continues as it trends right now, roughly 6%/year.
Current value (actual): $371,000.
Future value at 5 years (assumed): $496,481.
Difference: +$125,481.
Mortgage principle paydown: $36,000 (approximate)

Total approximate (possible?) equity at sale time: $160,000 ish.

Now of course you're thinking, $160K, no wonder everyone's getting rich off real estate! It's not that simple though. We have all sorts of other considerations here: taxes, interest, maintenance, months of vacancies etc. Here's the thing: we can afford the monthly payments on this. We can do so without sacrificing our savings, but the days of eating out would be done.

The rental income on the suite (1-bed) we'd calculate at $800/month. That's the high side of the rental market, but it's in a convenient location, we'd clean the place up and replace anything needed. We pay close to that now, so we anticipate being able to have that kind of income come in. That income would go directly towards maintenance of the house and property taxes. Our tax bracket wouldn't change, so our taxes would be based on an additional $9600 to our income, which we can eliminate by maxing out our RRSP contributions--we both have ample room from our years in college and low-income employment. The room is there for five years.

So why wouldn't we do this? It looks like a no brainer on paper. Even for a boisterous bear like me.

What if we changed the assumptions to something like this:

We experience a moderate correction of 6%/year. I don't think even an ardent bull could argue that this is well in the realm of normal possibility and is fairly indicative of the 94-2001 correction which witnessed just modest price reductions. When compounded though, those modest corrections can hurt.

Current value (actual): $371,000.
Future sales value at 5 years (assumed): $245,519.
Difference: -$125,481.
Mortgage principle paydown: $36,000 (approximate).
Approximate loss: $89,481.

Again we've used the rental income to cover taxes and maintenance as a simplistic way to remove those variables out of this complicated analysis. Regardless. When the market increases, you obviously come out ahead. But when the market decreases, you really do get hurt if you have to sell.

If you don't have to sell, you may find yourself living in a place with negative amortization, so you can't go get a HELOC and renovate to make it more comfortable.

It's this possibility that keeps us out of entering into this kind of scenario. It is just too much risk. That 6% decline over 5 years is a compounded 30% correction. That could very well be a reality. It could be less, it could be more, it could be faster, it could be slower. Even if we halved that assumption to 3%, that would still be a $30K loss all things considered. That's my master's degree I want to do over the next few years. That's approximately one-third of our income. That's a lot of money. Did I say a lot?

All signs point to a slowdown in both sales and growth. All signs point towards a looming economic downturn. Dodge is calling on the government to let the market correct the debt crisis, which means some pain is predicted, including raising interest rates. The federal government is trying hard to orchestrate their own defeat because come October 2009's scheduled election there is a highly likely scenario of a less-rosy economic (dare I say recession?) situation.

And this analysis is why we will rent for at least another 6 months. Unless we buy, gulp, a condo; which we'll run over tomorrow.

Friday, October 19, 2007

Why Realtors and the MSM are suspect

Letters to the editor are offered primarily as a means to give voice to opposing viewpoints to those of original authors of works in newspapers. It is a means for people in the know about particular issues to raise concerns about editorial stances or facts that are misrepresented in particular articles.

Letters to the editor are often used by non-governmental organizations to advance a particular political viewpoint or belief. Rarely are letters to the editor a commercial venture meant to sell a product.

I guess someone forgot to tell the editors of Kelowna's The Daily Courier. A few days ago they published a story House out of reach for average family. It centred around one oft-kicked-around-here theme:
The average annual household income of a family in Kelowna is $65,139, well below the $88,000 a year needed to support the mortgage on a home selling for $500,000 – the average price for a single-family home in the city.
It was balanced and included a number of quotes from one relatively impartial expert and one from a totally commission compensated mortgage salesperson who stated:
Despite all the barriers, Wilkinson says now is the time to buy a home, be it an average single-family home or a little condo, because prices will only go up. Once you‘re in the housing market, you‘ll see your equity grow, allowing you to accumulate a down payment that can be used to move into a bigger and better place.
Hardly accurate or impartial. Don't believe me? Ask all the Americans who "begged, borrowed and stole down payments, or took out negative amortization (zero down) or got parents to co-sign," and still lost their shirts. Even though they were told real estate had nowhere to go but up. Remember that Canada isn't the only North American country with a baby-boom generation demographic bubble. Regardless, that statement offset the earlier statement by an impartial economist that claimed an average family income could not support an average single family HOUSE (not condo or townhouse, but HOUSE). That is accurate.

This story gets better. A Realtor by the name of Damon Enns wrote a letter to the editor that was published yesterday. It's a dandy. And it's conveniently not available online, so I'll republish it here in its entirety for your reading pleasure. Enns "felt" the story was inaccurate so he needed to "clarify"--read repeat what Wilkinson said; but what Enns was really doing was getting a plug for himself and his property listings.
The Daily Courier (Kelowna), Page A11, 18-Oct-2007

Homes aren't out of reach for new buyers
By Damon Enns

This letter is in reply to the article Home out of reach in Tuesday's Daily Courier.

I want to encourage all the renters, and those who are tempted to give up on buying a home, that owning a house is not an impossibility.

In a matter of two short years, I went from being unemployed, broke, and living in the home of a benevolent family, to owning my own five-bedroom house with a two-bedroom in-law suite.

I was able to perform this "miracle" by getting a job, saving some money, buying a condo, getting married, selling the condo for a profit, using my real estate profit as a down payment, and using the combined income of my wife, myself, and two bedroom in-law suite to qualify for a loan.

I am employed by Re/Max now, and my wife and I have a heart and mission to help people fight the giant that we faced, and to get into their own home.

Many of my clients who bought homes when I first started as a realtor have already sold their "starter" homes and have moved up a level or two.

I strongly encourage everyone who dreams of owning their own home, as I did, to find out what they can afford right now, and find out how to buy it. Get on the train because it isn't stopping anytime soon. I am currently marketing an $80-million condominium project on KLO Road called Orchard Springs.

Sales start soon, but the condominium will not be completed for approximately 18 months. But what an excellent opportunity to step up into a house. CMHC has a "flex down" program, and different lending institutions and bond companies have informed me that they may even "spot" qualifying buyers their 10 per cent deposit. What an opportunity.

All a person has to do is save and/or borrow some money for the deposit, and then watch their leveraged investment grow to the point where they have the down payment for the house that they want.

Unless the hundreds of thousands of Easterners "fixin' to retire" in the Okanagan change their minds, fine condo projects like Orchard Springs (with its rich interiors, indoor pool, and beautiful landscaping) will continue to be a hot commodity.

I should mention that there were other important motivating factors for getting married besides home ownership, but the point remains the same. House ownership is not out of the reach of the average Okanagan family - there just may be a couple of extra steps to make the dream home a reality.

Damon Enns,
Check out my bolds. How the F&%$ did those get past the editor! The guy is getting free advertising. Now in all likelihood, he's actually paid for this advertising through his copious contributions to the classifieds and real estate sections of the Daily Courier. This guy is a gem. Almost as much as the editor of the paper is.

I have to continue with my BS-o-meter analysis. I'll cut and paste statements this guy passes off as "facts" in his "letter."
  • Get on the train because it isn't stopping anytime soon.
  • All a person has to do is... watch their leveraged investment grow to the point where they have the down payment for the house that they want.
  • Unless the hundreds of thousands of Easterners "fixin' to retire" in the Okanagan change their minds...
Wow. I just puked a little in my mouth. This guy is why Realtors get such a bad name. And that paper's editor is why many of us don't trust the MSM anymore. They published a response letter calling them out today, also not available online. The letter writer didn't challenge Enns "facts", just the editor's misguided publishing of advertising as "expert" opinion.

I'll leave the rest of the discussion up to you, folks. I'd especially like to hear from the 3 or 4 Realtors that I know are frequently reading this blog (you people really should stop reading from your office if you want to remain incognito). Please feel free to comment anonymously. How do you justify or defend this kind of BS? Is it a savvy marketing strategy? Is this "gorilla marketing" or "viral marketing"? Do you take sales and marketing seminars on this sh&t? Inquiring minds would like to know.