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.