Vancouver Olympic Village loss scenarios

We’ve seen a lot in the news lately about potential losses at the Millennium Water Olympic Village and what it means for Vancouver city taxpayers.  The developer still owes the city $731 million which would be ok if they could unload the units for the ‘hot market’ dream of $950 per square foot.  Unfortunately all the potential buyers appear to have noticed that the Vancouver real estate market is in a bit of a slump.

Local developers are urging the city not to undercut the market for their product, but it’s not exactly a secret that they’re going to be dropping the price on these units in an effort to get rid of them.  The loss to taxpayers has been estimated anywhere from ‘tens’ to ‘hundreds’ of millions of dollars.

Curious how different sales scenarios would play out?

Well you’re in luck!  Jesse has put together a spread sheet showing loss levels based on different sales prices.  He expands on this in the following comment:

Based on my calculations at $800psf which is pie-in-the-sky, the City’s shortfall will be close to $275MM if they can unload the units within about a year. This includes debt servicing for the past year plus the next year.

If they can find a sucker to take these units on in a bulk purchase for $700psf, they will have lost about $330MM. If they find a reasonable investor to buy them at $450psf, they’re out $450MM. Good luck finding someone willing to buy these bulk at $700psf.

Based on my analysis, if the CoV can’t find a bulk purchaser, the BEST they can do now is slash prices hard, to maybe $600-700psf and clear them out, including the rentals and commercial space, in a massive orgy of post-Olympic speculative feeding through Rennie et al. They will have losses of $350MM cast in but they save $100-150MM compared to what they would have to face if they held onto them and the balance of the debt for another few years.

I don’t know how the City is coming up with its numbers but I think they need a little one-on-one time with Bob Rennie so he can slap them in the face with a giant reality fish.

So rip off the bandaid or drip drip drip, which option do you foresee the city taking?

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Donald Duck
Donald Duck
9 years ago

@jesse: Like in the past 5 years?!

hmmhmm
hmmhmm
9 years ago

haha…a day late and a dollar short

hmmhmm
hmmhmm
9 years ago

Vote this post up if you DON'T know anyone in the last 4 years that have gone with a 20 year mortgage.

hmmhmm
hmmhmm
9 years ago

Let's put it to a vote.

Vote this post up if you DO know anyone in the last 4 years that have gone with a 20 year mortgage.

Anonymous
Anonymous
9 years ago

Red tape in B.C. boosts prices of some homes by $100,000, municipal politicians told

'If governments want to make homes in B.C. affordable, they must reduce red tape, bring in tax reform and find other creative solutions, municipal politicians were told Monday.'

http://www.vancouversun.com/business/tape+boosts+

Jack
Jack
9 years ago

@Anonymous:

Sort the mortgage that was taken out in the last 5 years donkey and see what you find?

Anonymous
Anonymous
9 years ago

@Animal Spirit:

"Nice attempt to spin the conversation though."

I'm not spinning anything. After all, I'm not the one claiming that it's "pure fantasy" that anybody in Vancouver would have a 20yr mortgage or that "nobody has a mortgage of less than 30yrs".

But, whatever, it's clear which posters here choose to back up their statements with verifiable facts (and a big thank-you to those of you who do) and those who consistently confuse their opinions with reality.

No More Gordocracies
No More Gordocracies
9 years ago

If the city sells for 600.00 sq and takes the money and invests in gold and silver bullion they will end up back at the equivalent of 950.00 sq in 6 months to a year as gold is going to go to at least 1650.00 from here (1290.00) which would just about make up for their shortfall.

And why shouldn't the city invest wisely as in gold as European central banks announced today that they are no longer going to sell gold…VOILA!

Get ready!!!

European Central Banks Halt Gold Sales
http://www.cnbc.com/id/39376353

jesse
9 years ago

@Anonymous: A 55 year old a few years away from retirement likely will not have 25 year am, if he has a mortgage at all. I think CMHC has some data on their MBSs that show the average LTV of various pools. For the most part the pools do not have obscenely high LTVs. That likely means people aren't rolling over perpetual 25 year terms on renewal: they're trying to pay the darn loans off before they retire.

Still, using the "principal repayment will save us from negative equity" argument doesn't justify overpaying. And a market doesn't need abject distress to precipitate price drops, though it sure helps.

Animal Spirit
Animal Spirit
9 years ago

@Anonymous:

A sample of 50-100,000 mortgages is great, however analysis using 'average mortgage amount/payment' and 'most popular' says nothing about the distribution of new mortgages or how many people would be under water if prices dropped 15%. Nice attempt to spin the conversation though.

jesse
9 years ago

@C-Note: "anyone corresponding to a principle paydown of less than 15% on Jesse’s chart will be underwater."

The vast majority of people did not buy at peak prices, though many may have refi'ed based on market value. For large-scale distress I think prices need to drop 25-30%. That happening in 5 years or less is very possible.

Anonymous
Anonymous
9 years ago

@Best place on meth:

Once again, when the facts are put to you, you just make up more nonsense.

Here are some more numbers, from ratesupermarket, but I'm not sure how reliable they are as I couldn't find much about their collation methods, other than it's from a sample of 50-100,000 mortgages across Canada (of which, they say, Vancouver represents about 10%).

Vancouver:

Average mortage amount: $363,483

Most popular amortization period: 25 Years

Most popular rate type: Closed Fixed

Most popular term: 5 years

Average monthly payment: $1,812.84

But NOBODY has an amortization <30 years in your opinion, right?

VHB
VHB
9 years ago

September Projections for month totals

Days elapsed so far 18

Days remaining 3

Average Sales this month 102

Average Listings this month 231

Projected sell/list 44.2%

SALES

Projected month end total 2149 +/- 42

95% Conf Interval lower bound 2107

95% Conf Interval upper bound 2191

NEW LISTINGS

Projected month end total 4857 +/- 49

95% Conf Interval lower bound 4808

95% Conf Interval upper bound 4905

MONTHS OF INVENTORY

Inventory as of August 31st 15962

MoI at this sales pace 7.43

Note: This is a simple linear projection of month end totals.

This provides the answer to the question

"What will month end totals be, if things continue

on the same pace we've seen so far this month?"

hmmm....
hmmm....
9 years ago

Hey Crashcow can you please update the Sept sales and listing chart? My stupid bull friends only understand pictures.

C-Note
C-Note
9 years ago

Combining the wisdom of posts 123 and 124, if there is a 15% correction that takes 5 years to play out, anyone corresponding to a principle paydown of less than 15% on Jesse’s chart will be underwater. That’s pretty much everyone.

Best place on meth
Best place on meth
9 years ago

90% of Vancouverites going 35 years makes perfect sense.

The rest are probably 30 years with NONE at 20 years.

Cheerleaders have the silliest fantasies.

jesse
9 years ago

So to be clear, here are principal repayments as % of initial at various ams and fixed rates for 5 year terms:

am 3% 5% 7%

——————–

35: 8.7% 6.0% 4.1%

30: 11.1% 8.2% 6.0%

25: 14.5% 11.5% 8.6%

20: 19.7% 16.6% 13.9%

15: 28.5% 25.5% 22.7%

10: 46.2% 43.9% 41.5%

5: 100% 100% 100%

Food for thought: when rates go up, guess what? Your principal payments are heavily weighted to the end of the term. This makes sense when you consider a 0% loan would have a linear principal repayment schedule.

More ominous, when interest rates increase, savings rates from regular payments to mortgages will be pushed out.

Renting
Renting
9 years ago

"90 per cent of first-time buyers go for 35-year amortizations 90 per cent of these buyers are putting down 10 per cent or less."

So with SSB's prediction of a 15% correction – 90% plus of first time buyers over the past few years will be under water. Factor in legal fees, CHMC fees, PPT, and that healthy real estate commission to sell and you have a lot of trapped people. They will need to come up with 50K to 100K to sell. That means no trade up buyers on the horizon which then turns the 15% correction into a 30% decline and then a 50% crash pretty quick.

Anonymous
Anonymous
9 years ago

@LMGTFY:

Thanks for the numbers. So 90% of Vancouver FTBs go for a 35yr amort, but it doesn't say what the rest of the buyers do. I notice some anecdotal data from a variety of brokers at the bottom of the link. One says "A 50-50 split between 25- and 35-year amortizations, no one goes 30 years", but that's in Ontario.

fixie guy
fixie guy
9 years ago

Anoymous Says: "I’ve no idea what proportion of buyers take 20,25,30,35yr mortgages in Vancouver. If you have the stats, feel free to post them."

Page 24 of the 2009 CAAMP report:

http://www.caamp.org/meloncms/media/Fall%20Report

47% of new mortgages on a new purchase have amortizations over 25 years breaking down as 19% at 30, 23% at 35 and 6% at 40. For the entire market ('second' mortgage, renewal and inactive) it's 18% over 25 years. A little over a third are variable.

paulb fan
paulb fan
9 years ago

@OV Renter:

Fall is officially here!!

You mean "the" fall, that follows "free". hohoho, hahaha

Devore
Devore
9 years ago

@Anoymous:

That’s called “moving the goalposts”. Devore said I was “clueless” for thinking that a 20yr mortgage means 50/50 interest/principal payments. I showed him otherwise.

Oh yeah, you sure showed me, with your 20 year amortization. Now move the goalposts back to regulation height.

LMGTFY
LMGTFY
9 years ago

@Anoymous:

Kim Arnold

Dreyer Group Mortgages (Vancouver)

90 per cent of first-time buyers go for 35-year amortizations 90 per cent of these buyers are putting down 10 per cent or less.

From this Globe and Mail article.

House
House
9 years ago

@Anoymous: You tell us: how much principal is repaid in the first five years of a 35, 25, and 15 year mortgage? For those of us who don't know.

crashcow
9 years ago

A friend asked today: "I’ve been waiting around, holding off buying a place for a couple years for the market to crash, but no luck yet. I’m thinking of just saying screw it and buying something anyway. Thoughts?" My response: "You didn’t miss much by waiting for the last few years. Prices started falling Spring ‘08 when the bubble got too heavy. By the time the financial crises hit in fall ’08, house prices were already 15% down. This bust would have kept going, but the gov’t reacted strongly to the financial crises by slamming interest rates to record lows, reflating our housing bubble in the process. The bubble got heavy again April this year (I started posting on facebook) and prices have been falling now for 5 straight months. There is no way the gov’t can cushion the fall… Read more »