July Low-end Market Watch

Our area of interest is Oak Bay, Victoria, Saanich, View Royal, Esquimalt, and Langford.

Our criteria for houses is under $425K with a suite or suite potential. These are total numbers of listings and sales since late January.

176 total listings (9 new since July 17)
141 total sales (16 sales since July 17)
sales to listings = 80% (up 6%)
17 taken off market (1 twice)

Our criteria for condos is 2 bed 1 (or more) baths under $250K. Again, total numbers since late January.

309 total listings (22 new since July 17)
212 total sales (13 sales since July 17)
sales to listings = 68% (down 1%)
46 taken off market

SFH inventory in our segment continues to dwindle. For every new listing in July, 1.16 homes sold. We've been watching this segment very closely and honestly would have gone to check out a few had any of them been deemed viable options for us. The reality is they're not. Back in February, we saw about a dozen potential homes. Today, not so much. SFH are getting more expensive in this segment. We don't see anything priced above $425K. I'm almost willing to bet that if we changed our criteria to $450K we'd see many more properties. That's barely a 6% increase in price, but wow does it ever price us out quickly.

Condos are doing funny things right now. We're seeing prices all over the place. Despite the 68% sales/listings ratio I'm tempted to think that condos in our segment are definitely in a bit of an inventory spike/buyers market. We're seeing one-week price reductions. You can see some signs of rush selling; which is likely a result of needing to close on the next purchase rather than any market-related panic selling. We're also seeing fewer flipped units.

SOFT LANDING EXPECTED

Last night, we were at an economic outlook presentation by Craig Alexander, Vice President and Deputy Chief Economist for TD Bank Financial Group, with a specific focus on the local real estate market. I'll attempt to summarize his key points, much of which has more to do with the overall markets in general and really suggests how interconnected real estate and stock markets/economics have become:

REAL ESTATE HIGHLIGHTS

• expect a 25-month period of increased market volatility caused directly from US sub-prime implosion which won't be over until at least Q4 of 2008
  
• Canadian companies with exposure to sub-prime debts will be fine. CIBC may have to write down $100M, in which case, markets will react, CIBC will take a stock price hit, you may want to buy CIBC stock then as you'll get a good deal on a long term hold
• Victoria RE is not in a bubble, supply/demand ratios are too tight (2.5 months inventory)
• Edmonton RE is in a bubble, supply/demand ratios are too loose (9 months inventory)
• The days of flipping RE in Victoria for quick profit are done for foreseeable future
• RE growth expected as SFH 5% real/7% nominal; condos 4% nominal
• Revert back to fundamentals of RE investing; now it really is about location
• Quality of construction is expected to be a significant issue in the next decade, prepare for another "quality crisis"
• Owning a home is still a good economic choice

GLOBAL STOCK/ECONOMIC OUTLOOK

• Expect interest rate hikes between 25 and 50 points in 2007 in all G7 countries except US
• Markets will be volatile due to rising interest rates and moderating corporate profits
• Canadian productivity is the number one economic issue
• Central Bank has inflation under control
• Tight labour markets are keeping supply/demand ratios close in all sectors
• Chinese market, despite volatility, will continue to outperform all others with exception of India
• Outside North America and China, German market is most attractive
• Want to get into China but can't stomach the risk, look to Japan, as they are China's largest exporter
• Consumer spending is directly related to employment and wage gains (low unemployment/wage inflation)
• Corporate America are high net savers, recession unlikely
• Canadian dollar does not have room for increases, expect volatility, look for settling at $0.93 US
• Upper limits on commodity prices have been reached, volatility for 6-8 months, moderate growth (2-4%) supported by rising global demand
• Equity returns will moderate and slow profit growth, look for balanced mutual funds to return to 7-8% YOY from 10-12%

Craig spoke to issues that are near and dear to my heart.

On inflation: CPI is really good at counting what it counts. The real issue is that it doesn't count what we spend our money on, and what it does count discounts the fact that products change. Yes you are spending more than 2% on the things you buy. But don't worry because the BoC has long since departed from using the CPI as the main index it uses to set monetary policy.

Local RE: buyer beware. Location, location, location. Diversify, Diversify, Diversify (if all you hold as investments is property, look out).

Stock Market: if you're heavily weighted in commodities/oil & gas, it's time to re-balance your portfolio; look outside North America for long term growth.

Mortgage Fraud: it's on the rise

According to the Canadian Association of Accredited Mortgage Professionals mortgage fraud is a growing problem. This article on the CBC website points out some of the highlights of what could well play significantly into any repeat of the sub-prime lending woes of our southern neighbours up here in the land of endless prosperity.

Some notable quotes:

The mortgage industry in Canada has undergone dramatic changes over the last several years.

As more lenders and mortgage products come on the market, competition for business increases, resulting in increased approval rates and reduced application processing time... [creating] more opportunities for various types of real estate fraud involving titles and mortgages.

The average case of real estate fraud in Canada is now about $300,000.

In 2005, real estate title fraud claims accounted for 33 per cent of the total dollars paid in claims at title insurance company, First Canadian Title, up from six per cent in 2000.

So just what exactly is mortgage fraud? While it includes the obvious fraudulently obtained mortgages had through identity theft, it also includes many other less, how shall we say this?, socially frowned upon actions:

Mortgage fraud is the material misstatement, misrepresentation or omission relied upon by an underwriter or lender to fund, purchase or issue a mortgage loan.

Mortgage fraud occurs in a broad range of activities related to property, employment, identification, equity and title. These include such activities as inflating or deflating appraisals and valuations of property, misrepresentation of property characteristics such as forged or altered MLS (Multiple Listing Service) listings, and misrepresenting commercial property as residential or the number of units in the property.

Fraud can also be perpetrated through false information provided on loan applications and employment and financial statements, and by falsified or misrepresented down payments, by taking loaned money and using it for different purposes, withdrawing money before closing, the fraudulent transfer of title and mortgage disclosure, and when a property is not held in the name of the seller. (emphasis mine)

In a five year period (roughly equal to the current bull market in RE) one Canadian insurance company has experienced over 500% jump in fraud-related claims. Wow. And this for a problem that no one wants to talk about, according to CTV:

It's a crime-wave sweeping the country, and it's a problem no one wants to talk about – not the banks, not the government, not even the victims.

So who's looking out for who regarding this? Seems like the banks are starting to look out for themselves: Ms. HHV informs me that more than ever, her bank is requiring appraisals on mortgages in this town. Of course, that could mean they don't have the same confidence in a continued rising market here anymore.

More mortgage fraud info can be found here.

Worst case scenario:

Thanks Jack! for telling it like it is

After a story about the most expensive home in town, comes an article about the cheapest house in Victoria. Do you think the editors at the TC came across my little rant from two days ago? Not likely, but never-the-less, good ol' Jack Knox wrote a reasoned article about the perils of astronomical housing prices in Victoria. We say, good on ya Jack.

Here's some notable highlights:

Here it is: Two bedrooms. One bathroom. Built in 1931. Just 836 square feet. Railway tracks out back. At $325,000, the Esquimalt rancher is the cheapest single-family house listed on MLS in Greater Victoria.

"It's a cute house, but it's very small," says real estate agent Deanna Noyce of the property at 1255 Colville Rd. "It's perfect for a first-time buyer." Yikes! Imagine being a first-time buyer in today's climate... $325,000 to get your foot in the door? That's more like a nightmare. How, when you compare Victoria house prices to incomes, is this sustainable?

People back home in Ontario thought she and her partner were nuts to pay $200,000 for it three years ago, but from a Victoria perspective it was a bargain, particularly when compared to what was then the lowest-priced house, a bug-infested $196,000 fixer-upper with no plumbing and a caved-in roof held up by sticks.

In 1985, the average price of a single-family Victoria home was $93,865, or less than twice the average Victoria family income of $51,000.

By 1995, the average home had risen to $242,012, or five times the average family income, which had dipped to $47,600, according to Statistics Canada.

By 2005, the same house cost $463,399, more than seven times the $64,100 earned by the same family.

In June of this year, that house sold for $573,415. The income stats aren't yet available, but assuming a five per cent salary increase in the past two years, the house-to-income ratio would be 81/2 to one.

Thanks Jack! for making people read about the fundamentals again. Emphasis is mine. I can't think of a better way to thank Jack, apart from a letter to the editor, than a donation to his fundraising effort for Cops for Cancer Tour de Rock.

Victoria Mansions: keeping the MSM honest?

It never ceases to amaze me that Victoria has some fantastic properties. I rode past this one the other day on my bike. I knew it would be another on the long list of always-for-sale uber properties on our waterfront loop.

The Times Colonist states:

The Oak Bay property that set the record last year for the highest sale price in Greater Victoria is on the market again - but for $7 million more

It is one of several Greater Victoria properties on the multiple listing service with price tags topping $10 million as Victoria's real estate market continues to sizzle.

"There are definitely more properties listed at this price point," said real estate agent Sylvia Therrien, who is selling the estate at the corner of Rutland Road and Beach Drive.

Within this group, the Rutland property, with more than 215 metres of waterfront, three islets, a private woodland, seven bedrooms and 10 bathrooms, is the "crown jewel," she said yesterday when asked to explain the $7-million jump.

Am I the only one that doesn't get this logic? For $#@& sakes Sylvia, they've done nothing to the property in a year and you price it up by 60%. And an even bigger what the $&#% to the TC for not questioning this one bit. No market in Canada has grown by 60% in the past year. Victoria's hasn't even gone up 10%. Sizzling, yah right.

Record sales sure. Record sale prices too. Don't forget record number of listings. Rising interest rates. A forestry industry that is all but shut down. An economy that has inflationary pressures that could lead to recession. A stock market that has lost over 700 points (4%) in four days. Keep it up pumpers, keep it up.

Update:
OK. I shouldn't get myself worked up over this stuff. So I'm going to do two things today: a long ride to de-stress after my Last University Exam Ever; and show the MSM of this town just what I think of this sewer, ahem, real estate pumpage with a taste of soccer-inspired hooliganism left over from the U-20s...

Updater: CBC is on it today... look out.

UPDATERER: That 4% loss in a week has almost doubled today; we're now talking about a loss on the week of close to 7%. And we still have a day of trading left. I genuinely hope you all aren't losing too much savings today.

The U.S. subprime mortgage sector has been a source of worry in the United States for several months, as rising interest rates have led to more people falling behind on their mortgages or going into default.

In addition, the failure of a group of banks to a sell a debt package for Cerberus Capital's acquisition of Chrysler prompted worries about corporate lending.

Tuesday News Hunt

Just doing some blog-related research today. Here's what I've come across:

Dow 14,000: I'm skipping the party

Big threats are being ignored as investors celebrate the stock market's latest milestone. We haven't seen such arrogance since the heady days of 1999 and 2000.

it was logical to conclude that many of these [subprime] mortgages would be defaulted on, creating ramifications throughout the financing and economic food chain.

Canadians go on a shopping spree in May; Dollar rises to 30 year high in July

Sales advanced in all retail sectors in May except in the furniture, home furnishings and electronics stores sector. Retailers in this sector saw sales decline 0.8 per cent, following six consecutive monthly gains.

I guess we're not buying stuff for our new homes anymore then right?

"Perhaps most notably, the gains are fanning out from Alberta, with almost all provinces posting impressive growth. This clearly puts additional Bank of Canada tightening in play, above and beyond a second quarter-point rate hike in September."

Inflation is not, I repeat, NOT, contained to the West, as many people like to argue. Nope. Loose monetary lending policies are all pervasive and even where incomes and RE prices aren't going crazy, high ratio lending is driving consumer trends skyward.

Both the TSX and the Dow took MASSIVE hits today: TSX down 400+ points

The TSX was up 13 per cent year-to-date at the start of this week.

Biggest single day drop in 3 years. Inflation concerns are the cause. Down over 500 points this two-day-old week. Is it strange that this is happening in July? Usually this kind of thing happens when people are at work trading, like in October.

"And anybody that cannot take this sort of thing should not be in the markets."

Does the same rule apply to homeowners?

Jitters over the subprime mortgage sector were compounded after Countrywide Financial Corp. — the largest U.S. mortgage lender — said its profits fell sharply as mortgage banking earnings tumbled. The company also cut its profit outlook amid rising mortgage delinquencies.

Despite the WARNING SIGNS, US bulls call for 7%+ gains in the Dow before year is out

"Anybody who argues with momentum, until the momentum becomes irrational, is going to get slaughtered," said A.G. Edwards market strategist Al Goldman on CNBC this week.

Leave it to BubbleVision to come up with Sh$t like this. Nope, no irrationality in this market, nothing to see here, keep moving. Can anyone remember a time in recent history when both the RE markets and the Stock markets have gone completely bullish and irrational together like today?

the market could be vulnerable to a "melt-up" that could shoot the indexes substantially higher in the next few weeks. And there's little to support stocks if a melt-up gives way to selling. The last big melt-ups were in 1987 and 1999, when the Dow moved from 10,000 to 11,000 in just 23 days. Early in 2000, the market tipped started [sic] a slide into the worst bear market in generations.

Bulls, of course, will argue: "this time it's different." I should disclose that two mutual funds that I own, both that regularly generate 20% plus rates of return yearly, are in the midst of equity sell-offs and are aiming for 50% cash holdings during the upcoming storm they foresee happening.

My thoughts on the dollar: sure our dollar seems strong, but it's measured against an increasingly weak US benchmark. Talk to someone buying Euros or Pounds and they'll tell you just how strong our dollar really is.

Inflation is crazy right now. I know, I know, look at the CPI you'll say, it doesn't lie. Nope. You're right. It doesn't lie. It just doesn't count a lot of the things Canadians are spending money on right now. Especially things that are subject to irrational market forces: like food; especially fresh food. My food bill this year is almost 30% higher than last year. And it isn't because I'm getting fat. It's because food is more expensive.

Our gas consumption is down. We drive less than ever. But our gas bill is roughly the same as last year because gas jumped over that psychological benchmark of $1/L and will likely not drop below it again anytime soon.

Red sky at night, sailor's delight. Red sky in the morning, sailors take warning... am I the only one seeing red at economic dawn these days?

Building Code Aftermath

First the Leaky Condo Crisis and now this:

Firefighters blame lax building code

Firefighters said it was only a matter of time before a fire of this magnitude broke out in the area, blaming poor construction materials and lax building codes.

Damage could have been minimized, they said, if building codes required a greater distance between houses and required certain types of siding to be used.

"We're grateful that no one was injured.… However, we have devastated a community emotionally," said fire department spokeswoman Nikki Booth. "A fire of this size and this magnitude definitely creates tremendous trauma to the community and we'd like to see that those code changes come into place." emphasis mine

Building codes in Canada are another example of where politics trumps common sense. Does it make sense that what is reasonable to build in Ontario would withstand the environmental pressures in Victoria? Of course not. That's why we have a national building code that provinces use to base their provincial building code standards off of. But when provinces hell bent for development--of which, BC and Alberta, stand out--ignore the common sense ramifications of engineered product suitable for one climate and not another, we get debacles like the Leaky Condo Crisis.

What's interesting about that crisis is that it's not a Vancouver problem, nor is it limited to condos. It was a national building code problem that became an issue for moist environments: anywhere on the west coast fits this description; from Prince Rupert all the way down to Victoria. Sure condos get the attention, after all they are a loud collective voice. But houses were built using the same code. I know of dozens of houses in this town that have had significant structural "surgery" to fix moisture related damage to their "bones." I've lived in some and seen work done to others. I live in one right now.

The Edmonton Fire Service is blaming engineered wood products for a lack of ability to withstand fire. Apparently engineered joists and trusses go up a lot quicker than their solid wood counterparts. Fair enough. Perhaps not surprisingly, vinyl siding burns quicker and hotter than other products. And guess what?, when you build houses too close together, you increase the risk of one fire growing into two, or in the Edmonton case, 10.

This is where economics come in. In a time of astronomical housing price increases, developers build as fast as buyers buy, and quite often not as fast as buyers buy. The cheaper the cost to build, the bigger the profit. Real wood costs money. Engineered wood products cost less money. Common sense says we'll see much more engineered products in new construction and renovations.

Not to put 2 and 2 into 4 or anything, but I'm guessing with the current push to develop anything and everything into a wealth generating vehicle, from amateur condo flippers to publicly held RE development corporations, we're in for some nightmarish times in the next decade as consumers. Write your MLA. Write your MP.